It reads like a script for a Hollywood movie—a poor protagonist happens upon an opportunity that has the potential of bestowing riches, but an evil curse threatens to spoil it all.

Unfortunately, it’s not a movie script. The scenario plays out repeatedly in many parts of the real world all the time. For many developing countries, managing natural resources and the increased revenues they bring is a tough haul.

Cue the extensive literature on the “resource curse” and the lack of consensus on how to run fiscal policy and manage budgets in resource-rich countries.

In some respects, this is like the “all-too-similar” sequel, because the tribulations associated with how to best manage natural resources, such as oil, minerals, and gas, seem to endure so that resource-rich developing countries are never quite free of them.

The “resource curse” and fiscal policy

High commodity prices and the discovery of new reserves offer the potential for much needed revenue in many developing countries—revenues that should help promote economic and social development, build human capital, and reduce infrastructure gaps in resource-rich countries. In a new study, my co-authors and I look at how to manage fiscal policy to achieve those goals while avoiding previous pitfalls.

The design of fiscal policy frameworks for resource-rich developing countries is beset by trade-offs and tensions. In fact, the volatility, uncertainty, and exhaustibility of revenues earned from resources have to be taken into account when formulating a scaling up of public spending.

• How to ensure short-term macroeconomic and fiscal stability?
• How to achieve long-term fiscal sustainability and adequate savings for future generations while allocating sufficient resources to meet development needs?
• How to address absorption capacity constraints that could limit the quality and effectiveness of scaled-up spending?

These are important questions that many politicians, policymakers, and economists face in such countries.

Recent academic and empirical work has enhanced the debate on this issue. On the one hand, such work has brought to the fore the need to avoid rigid policy formulations that would force countries with substantial development needs to keep the consumption of their resource wealth at a constant level over time (that is, borrowing at the beginning, saving when income is high, and lowering the rate of saving as income tapers off).

While persuasive, such work hasn’t offered practical approaches to managing fiscal policy in those countries and overemphasizes the role of resource funds, for example.

So, how could fiscal frameworks for resource-rich countries be made more flexible in practice? In our study, we analyze this question from a practitioner’s perspective, proposing specific options to effectively anchor fiscal policy while allowing for a sustainable scaling up of spending in the context of increased resource revenue.

In laying out the options, our study emphasizes that there is not a “one size fits all” approach since each country has its own set of economic and institutional circumstances to balance, such as resource revenue dependency, how long the reserves will last, and the country’s development needs. Furthermore, the large volatility of revenues earned from natural resources and the difficulty to predict those swings would call for prudence and gradualism in scaling up spending and for flexible fiscal rules to adapt to new information and changing circumstances.

Seven principles

Accordingly, we propose the following principles to guide the formulation of fiscal policy frameworks in resource-rich developing countries:

• The framework should reflect country-specific characteristics like revenue dependency and volatility as well as how long the resource revenue stream is expected to last—all of which may change over time.
• It should ensure the sustainability of fiscal policy. Depending on how many years the natural resource is expected to last before it is depleted, benchmarks of sustainability can be derived from simple constant consumption approaches—particularly for countries with short-lasting reserves—or from a broader focus on stabilizing government net wealth (not now, but over the long run).
• Policymakers can choose alternative fiscal anchors, either primarily addressing fiscal sustainability concerns (for example, permanently constant non-oil balance deficit rules) or focusing more on short-term demand management (such as a price-based or structural balance rule). Country characteristics should guide the choice of the appropriate fiscal anchor (see table below).
• Frameworks should be sufficiently flexible to enable the scaling up of growth-enhancing expenditure (for example, public investment to tackle existing infrastructure gaps), especially in low-income countries.
• In countries with large absorption constraints, the pace of scaling up may have to be gradual, while public financial management systems are reinforced and domestic supply constraints softened.
•  The volatility and uncertainty of resource revenue is critical for the design of fiscal frameworks, and having sufficient precautionary fiscal buffers is critical. A strong revenue forecasting framework needs to be developed and spending plans framed in a medium-term perspective.
•  The credibility and transparency of the framework can be supported by a well-designed natural resource fund. But the fund cannot be a substitute for an appropriate policy framework nor a panacea that obviates the need to strengthen overall fiscal management capacity. Funds need to be fully integrated with the budget and the fiscal framework.

The complete framework would comprise three elements:

1. Fiscal policy indicators–the best analytical measures of the actual stance of fiscal policy.
2. Fiscal sustainability benchmarks–provide a way to assess fiscal policy with a longer-term perspective.
3. Fiscal policy anchors–the rules or guidelines that would better fit resource-rich countries and their specific characteristics.

The table below illustrates the more appropriate rules possible along two specific dimensions: the horizon of their resource reserves and the relative scarcity of capital.

In previous global downturns, sub-Saharan Africa has usually been badly affected—but not this time around.

The world economy has experienced much dislocation since the onset of the global financial crisis in 2008. Output levels in many advanced economies still remain below pre-crisis levels, while unemployment levels have surged; growth in emerging market economies has slowed, but remains quite high.

But in sub-Saharan Africa, growth for the region as a whole has remained reasonably strong (around 5 percent), except for 2009 – where the decline in world output and associated shrinking of world trade pushed Africa’s growth down to below 3 percent.

Some better than others

Of course, sub-Saharan Africa is a diverse region, and not all economies have fared equally well. The more advanced economies in the region (notably South Africa) have close links to export markets in the advanced economies, and have experienced a sharper slowdown, and weaker recovery, than did the bulk of the region’s low-income economies.  Countries affected by civil strife (such as Cote d’Ivoire, and now Mali) and by drought have also fared less well than other economies in the region.

So why has most of sub-Saharan Africa continued to record solid growth against the backdrop of such a weak global economy?  And can we expect this solid growth performance to continue in the next few years?

First, the economic situation in sub-Saharan Africa has undergone a fundamental change since the beginning of the millennium. As we show in the latest IMF Regional Economic Outlook for Sub-Saharan Africa—launched today in Lusaka, Zambia—the region has been growing consistently strongly for over a decade.

Critical to the region’s recent success has been the steady progress and economic resilience of the region’s 26 low-income and fragile economies. Average per capita incomes in these countries is still well under $2 per day, but total output has grown by more than 5 percent in every year since 2004. Furthermore, the share of investment in this output has risen steadily – from 18 percent in 2004 to 23 percent now.

This solid growth record has been supported by several factors, including significantly less civil conflict, the generally favorable commodity price developments benefiting Africa’s natural resource exporters; and the extensive debt relief provided to most highly-indebted poor countries. But I would ascribe key importance to sound policy choices by African governments – both in terms of pursuing appropriate macroeconomic policies and pressing ahead with important reform measures.

Specifically, economic policies in the last decade have been directed firmly toward economic stability and market liberalization. Inflation has been tamed, foreign reserves have risen, and debt burdens have been reduced. Fast-growing export markets in Asia have been tapped. The result has been rising investment—domestic and foreign—the deepening of financial sectors, and stronger productivity growth.

Second, sub-Saharan Africa has been partially insulated from the adverse cyclical effects of the Great Recession because of a number of key factors.  Commodity prices for African natural resources have remained relatively high to date, sustained by the continued strong growth of major emerging market economies, most notably China.  African banking systems have not experienced the severe financial stresses recorded in the advance economies, in good part because they are not heavily dependent on external funding, relying instead on strong domestic deposit bases.

And African policymakers were able to ease budgetary policies to support economic activity during this crisis, instead of being forced to cut outlays because of severe borrowing constraints as occurred in past downturns.

Looking ahead

In 2011, output growth in sub-Saharan Africa averaged 5 percent. In 2012, we project that it could be a touch higher, buoyed by one-off surges in natural resource production and recovery from conflict and drought in western Africa. Looking beyond 2012, there is ground for solid confidence that growth rates at this pace can be sustained.

Not that everything is rosy. Unacceptable levels of poverty and poor social conditions still plague the region. Employment growth lags behind most emerging markets, with much of the growth still in agriculture and traditional services. Progress toward the Millennium Development Goals is too slow. And of course, with European finances still uncertain and geopolitical uncertainty troubling oil markets, the world economy could still take another turn for the worse. A resumed global downturn would hit African exports, investment, tourism, remittances, and aid flows to varying degree – slowing the pace of regional growth for a period but not derailing it over the medium term.

Addressing risks

What about new external risks? As discussed in depth in the latest IMF World Economic Outlook, high among the possible global threats is a more sustained deleveraging in the euro area, which could throttle the already hesitant global recovery and, among other things, depress commodity prices. But equally disruptive to world growth would be another surge in oil prices because of rising political tensions.

There would inevitably be adverse consequences for sub-Saharan Africa if either of these adverse shocks were to materialize. Although some oil importers would get relief from lower energy prices in the euro area downward scenario—and oil exporters would gain in the high oil price scenario—the general impact on the region in both circumstances would be slower growth, higher unemployment, and, in some cases, strained fiscal accounts.

Mitigating action could nevertheless be taken. Many, if not most, countries have the fiscal space to maintain existing government spending plans even if revenues are reduced by slower growth.

Special fiscal measures—such as cash grants to poor families or direct food assistance to school children to offset rising food costs—could help alleviate the impact on the most vulnerable in the event of sharply rising fuel prices. Monetary and exchange rate policies can also be supportive in countries with independent monetary autonomy—although in some countries, central banks will need to remain focused on reining in elevated inflation rates. Rest assured that the IMF would be standing by with financial support to support member countries experiencing severe stresses.

Meanwhile, ahead of any storm, it is important that countries where growth is still strong take every opportunity to build up their policy buffers now through prudent fiscal policies.

Longer-term development

Lastly, but crucially, what about the more distant future? How does sub-Saharan Africa keep up its good growth performance? Mainly, I think, by staying the policy course. That means maintaining prudent macroeconomic policies and improving the business climate further. It also requires broadening the revenue base and modernizing public financial management so that essential spending—including on infrastructure and public services—can be financed.

It is also vital that we keep a focus on the young and on inclusive growth. Better education, robust health, and realistic job opportunities are, in the long run, truly the only secure foundations to sustained prosperity.

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The uprisings that spread across the Middle East and North Africa in 2011 taught us that even rapid economic growth cannot be maintained unless it is inclusive, creates enough jobs for the growing labor force, and is accompanied by policies that protect the most vulnerable. And the absence of transparent and fair rules of the game will inevitably undermine the development process.

Hopes after the revolutions are high and so are people’s expectations. Hence, there is a need to pay more attention to socioeconomic issues in making policy decisions. In my speech today at the Arab Economic Forum in Beirut, I argued that we need an “Economic Spring” to complement what has become known as the “Arab Spring.”

Gloomy picture needs attention

At over 25 percent, the youth unemployment rate in the region’s oil-importing countries exceeds that of any other region in the world—a rate that reaches up to 30 percent in Tunisia and 32 percent in Morocco. Ironically, education in the region is not a guarantee against unemployment. In fact, unemployment tends to increase with schooling, exceeding 15 percent for those with tertiary education in Egypt, Jordan, and Tunisia.

In many countries of the region, poverty rates are unacceptably high while human development indicators lag behind those of many others elsewhere according to reports by the World Bank and the United Nations Development Program.

How to make growth inclusive

Medium-term economic strategies should focus on providing economic opportunities to all, including by providing equal and improved access to credit. Jobs cannot be created without aligning the education system to prepare graduates for what is needed in the modern labor market. Reforming the labor market itself is also needed to eliminate rigidities and boost job-creation.

It is also vital to promote transparency and reduce red tape to help foster a business-friendly environment and advance the role of the private sector in the economy and, hence, create necessary jobs. Progress in this area would also help bring the informal sector into the fold, which would spur the economy and promote more inclusive growth. There is simply no other way to create the 50–70 million jobs needed for the people joining the labor force and to reduce unemployment over the next decade.

Subsidy schemes, upon which many people depend, must also be well designed and targeted. The IMF estimates subsidies to cost about $210 billion, about 7 percent of the region’s GDP. Budgeted food and fuel subsidies account for about 16 percent of GDP in Egypt and 12 percent of GDP in Jordan, for example. Yet, only 20 percent of those subsidies reach the poor while the remaining 80 percent benefit the non-needy.

Price subsidies also encourage socially wasteful activities such as smuggling, black markets, and corruption. In Egypt, for example, price subsidies have reportedly led to the use of bread as animal and fish feed. Moreover, subsidized wheat – which is supposed to be used in producing “Baladi bread” – often ends up being sold in the black market to bakery shops that make fancy cakes, while the poor stay for long hours for bread and not get enough to feed their families. There has been also report of smuggling of gasoline and diesel, while the black market is widespread in the case of subsidized bhutan gas cylinders, leading frequently to severe shortages and long waiting lines.

To that end, replacing wasteful subsidy regimes that benefit mostly the wealthy with targeted social safety nets that protect the poor should occupy a high place on any reform agenda. Resources freed up by better-targeted subsidies could then be used for investment in infrastructure, education, and health.

Finally, it is important to realize that a socially inclusive agenda will only survive if it is homegrown and if economic and financial stability prevail. Therefore, sound macroeconomic policies are needed to keep inflation, which hurts the poor the most, and fiscal and external imbalances in check.

How the IMF can help

For its part, the International Monetary Fund is helping on three main fronts: policy advice, capacity building, and financing.

On policy advice, we have adapted our analytical work to face the new realities on the ground by integrating the concept of inclusive growth more systematically in our policy advice. In this difficult environment, the IMF is promoting measures to increase spending on, and improve the targeting of, social safety net programs that can mitigate the impact of the great recession.

We have also identified five areas critical to achieving more socially inclusive growth than in the past—job creation, better-targeted social safety nets, stronger governance and business environments, better access to finance, and greater trade access and integration.

Regarding capacity building, our efforts in the region are focused on providing technical assistance and training that aim to build strong institutions, particularly in public finance management and banking supervision; develop equitable fiscal policies to ensure more fairness; and construct good data to create a solid basis on which policy decisions can be taken. This is where we see great merit in a regionally consolidated statistical body, namely ARABSTAT. Such an institution would be important for transparency and governance in the region as it would take the lead in promoting the production and dissemination of data at the country as well as regional level. It would also spearhead efforts in improving data quality to meet international standards.

On financing, we have created new lending facilities and tools with streamlined conditionality partly in response to the financing needs in the region and are mobilizing other official financing to fill short-term fiscal and external gaps in a number of countries. Also, as part of our efforts to protect vulnerable groups in the current difficult environment, program conditionality in most countries has included a commitment by the government to strengthen the use of resources for social safety nets.

As part of a broader reform to make the IMF’s financial support more flexible to address the diverse needs of member countries, the Fund has created the Rapid Financing Instrument (RFI) and the Precautionary and Liquidity Line (PLL). The RFI provides rapid financial assistance to all member countries facing an urgent balance of payments need. The PLL, on the other hand, provides financing to meet actual or potential balance of payments needs of countries with sound policies, and is intended to serve as insurance or help resolve crises under wide-ranging situations.

We know that social exclusion and unemployment, especially among young people, are very painful and that the challenges ahead are formidable. We should not let the hopes and aspirations of the people who took to the street go unfulfilled. We must strive to ensure that the people of the Arab countries in transition have the opportunity for a fairer and more prosperous future.

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Housing construction projects are sprouting up across much of Latin America and mortgage credit is also growing very fast. Does this sound familiar? It should!

Easy external financing conditions and high commodity prices have led to important improvements in living standards and credit deepening in many countries of the region over the past decade. The credit expansion has been particularly impressive in the mortgage sector, where legal reforms and government subsidies have also played a role.

Although mortgage credit in Latin American countries is relatively low by international standards —at just 7 percent of GDP versus over 20 percent in emerging Asia and over 65 percent in the United States—it has grown at an impressive annual average real rate of 14 percent since 2003, with Brazil leading the pack. Home prices have also risen sharply over this period, particularly in countries where mortgage credit has expanded the fastest (for more details see Chapter 5 in our latest Western Hemisphere Regional Economic Outlook).

So, are housing vulnerabilities emerging?

Policymakers and analysts in the region should be vigilant about rapidly growing mortgage credit and home prices because, as we know too well, they can create financial instability.

Latin America has a long history of credit booms gone wrong and experience shows that while credit-driven asset price bubbles build slowly they can sour quickly. But then again, Latin America has a large housing deficit, so construction activity should be catching up as living standards improve and mortgage credit deepens from its very low base.

A proper assessment of the situation is hindered by the limited and weak information available for the real estate sector in Latin America.

Patchy information

House price data are only available for some countries—namely, Brazil, Chile, Colombia, Mexico, Peru, and Uruguay—and even when available, time series are usually short, with coverage often limited to large metropolitan areas or segments within them. The information on the stock and flows of housing, as well as on construction activity is also patchy. Complete information on housing-specific financial soundness indicators and household balance-sheet data is only readily available and complete for just a few countries.

Notwithstanding these serious data shortcomings, in our latest report, we find evidence that mortgage credit may be growing well above rates explained by economic fundamentals over the past three years in a few economies in the region.

In Brazil, mortgage credit has surged, although this may also be explained by the introduction of a government housing credit program (“Minha Casa, Minha Vida”) aimed at low-income households. Certainly, the rapid expansion of mortgage credit in some countries warrants careful monitoring.

At the same time, other indicators suggest that housing vulnerabilities in the region are currently contained. Nonperforming mortgage loans are still relatively low and mortgages are a small share of banks’ funding structure. Similarly, the few existing household indebtedness indicators are at manageable levels, although they are rising, especially for low-income households.

Closing data gaps on housing activity

Experience suggests that no matter how small mortgage markets are, they can have systemic effects. That is, vulnerabilities arising in these markets can have economy wide implications that once materialized are often difficult to address and solve.

What have we learned from the U.S. housing situation? Problems in a small market (the subprime sector) can become systemic quickly, especially in new markets with significant data gaps.

For these reasons, action is needed to close information gaps and strengthen oversight of the housing sector. Disseminating current information on housing-specific financial soundness indicators and household balance sheet data should help.

But deeper reforms (such as improving credit registries, providing programs to increase consumer financial literacy, and using loan-to-value and debt-to-income limits) are necessary to ensure that the growth of the housing market is sustainable.

The debate on austerity vs. growth has gained in intensity, as countries in Europe and elsewhere struggle with low growth, high debt, and rising unemployment. In essence, policymakers are being asked to tackle a continuation of the worst crisis since the Great Depression.

This would be no easy task under any circumstances. But it is made considerably harder by the fact that a number of countries need to engage in fiscal consolidation simultaneously. Complicating the picture further is the fact that monetary policy in most advanced economies is approaching the limits of what it technically can do to stimulate activity, while global growth remains weak.

There is no getting around the need to reduce debt levels. High debt leaves countries exposed to interest rate shocks, limits their capacity to respond to future shocks, and reduces long-term growth potential.

At the same time, we all know that fiscal consolidation―reducing deficits by cutting spending or raising revenues―can and usually does stifle growth. With more than 200 million people out of work worldwide, and with growth in advanced countries forecast at a mere 1½ percent for 2012, getting the pace of consolidation right is therefore of paramount importance. So how do policymakers strike the right balance?

As IMF Managing Director Christine Lagarde pointed out the other day, the growth vs. austerity debate is essentially a false one. There can be no lasting growth without sustainable policies, and right now that sustainability requires fiscal consolidation. But equally there can be no sustainable adjustment without growth.

So the critical challenge is to devise a strategy that is good for stability and good for growth. This is possible. But there is no denying that, in the short term, consolidation involves real costs and requires tough choices, the more so given that growth is already below potential and there is little scope for additional lift from monetary policy or external demand.

Growth is essential

Let us also not forget that in the past, growth has played the key role in reducing debt-to-GDP ratios. Policies aimed at enhancing growth should therefore be at the forefront of our thinking and should play their part: with inflationary pressures low or declining in most advanced economies, monetary policy should remain clearly supportive of economic activity, banks need to recapitalize so deleveraging stops being a brake on growth, and structural reforms need to be accelerated to boost medium-term growth.

Ultimately it is growth that will make the difference between successful and failed consolidation. Concerted action at the regional and global level can help.

Striking the right balance

Right now, practically every country within the European Union, plus many advanced economies in other parts of the world, need fiscal consolidation. The public debt-to-GDP ratio has reached a peak seen only once before during the past 130 years—during the Second World War. So in most advanced countries debt must come down and for that so must deficits.

A key practical question is, how fast?

The general principle to answer this question is that adjustment should be conducted in the context of well-specified medium-term plans, at a steady underlying pace that balances the need to bring down deficits against that of not undermining the recovery.

“Underlying pace” is worth stressing. It means that the adjustment path should be defined irrespective of cyclical fluctuations in output. Within that overall approach, there is scope for significant country by country differentiation: for countries where fiscal accounts are weaker, adjustment should occur more rapidly. Frontloaded and fast adjustment should be limited to countries where financing constraints leave no other option.

Are we on the right course?

From this perspective, adjustment is proceeding reasonably in all advanced economies this year. The current rate of deficit reduction in advanced economies, about 1 percent of GDP annually on average, seems about right.

For 2013, the degree of planned adjustment in most countries is also largely appropriate. A notable exception is the United States, where fiscal tightening will be excessive if current legislation is not amended—hence the talk of a “fiscal cliff.” Also, in a few euro area countries, the nominal fiscal targets for 2013 agreed before the current slowdown in growth may prove too pro-cyclical and may need to be adjusted or at least expressed in structural terms.

But all should be prepared for a possible need to recalibrate. If conditions worsen, countries should stick with their announced measures, but not necessarily with their nominal targets. That means not fighting the automatic stabilizers, the reduction in revenue and increase in spending that comes about solely because of lower growth.

If the outlook turns out much worse, policies might need to be recalibrated to be more supportive of growth. Of course, fiscal policy is not really suited as a tool to fine tune responses to small shocks, and changes in fiscal policies involve costs to credibility. But the underlying pace of adjustment may need to be reconsidered if headwinds from simultaneous public and private deleveraging prove substantially larger than anticipated or if there are further large adverse shocks.

Sustaining the effort

Even under optimistic assumptions, it will take many years for debt ratios to return to more appropriate levels.

Clear medium-term plans based on specific measures and backed by strong fiscal frameworks are key to establish credibility. Vagueness about adjustment plans would have a damaging impact on any country’s credibility, particularly in this environment.

In that respect, it’s worth noting that both the United States and Japan lack sufficiently detailed and ambitious medium-term plans to reduce their debt ratios. And while countries in Europe all have broad plans in place under the “fiscal compact“, in some cases the measures needed to accomplish the targets still need to be spelled out.

In this connection it is also important to pay attention to the composition of the adjustment effort between spending and revenue measures. Here the starting point matters. In general it suggests European countries should focus more on spending cuts, which tend to be more sustainable in the longer term; while relatively low levels of spending in the U.S. suggest more room to act on the revenue side.

Looking ahead

Since the start of the consolidation phase of the crisis two years ago, the IMF advice has been in line with the general principles mentioned at the outset. We have called for more or less fiscal adjustment depending on whether we felt fiscal adjustment was proceeding with insufficient vigor or excessive zeal given the growth outlook and financing conditions.

Looking ahead, we will continue to work with our member countries and help them come up with a policy mix that is right for their particular circumstances, while trying to ensure that the sum of country policies do not derail the fragile global recovery that’s currently underway.

This is not a good time, if ever there is one, to be dogmatic in our response to challenges. Rather we need to keep an open mind and be ready to adapt our policy responses if conditions warrant it.

Last autumn was a turbulent time for Europe. The debt crisis deepened and financial markets became embroiled in turmoil, driven by fears of widespread restructuring of public debt. The crisis has harmed growth, increased unemployment, and left a large number of people less protected.

We are now seeing some signs of stabilization. Most countries are reducing their deficits and even if debt ratios are still rising, the return back to fiscal health has begun.

The International Monetary Fund and the Swedish Ministry of Finance are hosting an international conference in Stockholm on May 7-8, with the purpose of sharing knowledge and providing guidance on the best way to achieve fiscal consolidation, and on the role that effective fiscal policy frameworks and institutions can play in this endeavor.

Learning from experience

Sweden provides an interesting case study for countries’ current predicament. In the early 1990s, Sweden was rocked by an economic crisis with escalating unemployment, double digit deficits, and a sudden loss of market confidence that raised the cost of sovereign borrowing.

In response, Sweden initiated a comprehensive set of reforms. Favorable external conditions helped, but domestic policies played a critical role in the adjustment. Strong fiscal tightening was implemented to regain fiscal sustainability and market confidence. This was accompanied by the effective handling of the crisis in the financial sector, and structural reforms that raised Sweden’s competitiveness, long-term growth rates, and real wages. A new fiscal policy framework—founded on a surplus target, a medium-term expenditure ceiling and a comprehensive top-down budget process—has since helped preserve strong public finances and prepared Sweden well for the current crisis.

The experience of other countries—both those staring into the headlights of a crisis and those more gradually realigning their economies to a sustainable position—can also provide valuable lessons for those now struggling with large debt, persistent deficits, sluggish economic growth, and a lack of market confidence. While recognizing that the current crisis is unique in its scope and scale, three broad lessons can be learned.

Developing a medium-term plan

First, a comprehensive and clear plan for restoring the health of public finances needs to be developed and adopted at the outset, although consolidation measures can be spread over time depending on country circumstances (countries that are feeling more pressure from financial markets would have to frontload the adjustment; others would have more time).

Countries that have succeeded in bringing down public debt from high levels, such as Canada during the 1990s, followed this approach. It is particularly important to be clear in areas where policy decisions are hard. In the current circumstances, fiscal credibility can be significantly enhanced by clarifying how the severe long-term challenges from rising aging-related (pensions and health care) spending will be addressed.

IMF staff project this spending to increase by an average of 4 percentage points of GDP in advanced countries over the next two decades. This trend cannot be ignored. At the same time, fiscal adjustment should be done in a way that protects the poor and most vulnerable, and shares the burden across the population. If painful fiscal reforms are not perceived as fair, they never gain the support of citizens.

Having a strong institutional framework matters

Second, well-designed fiscal institutions can support the implementation of fiscal plans. The importance of strong budgetary institutions—the set of rules and procedures defining the preparation, approval and execution of the budget—cannot be underestimated. Here too a medium-term orientation is important, particularly when it comes to public spending.

In countries like the Netherlands and Finland, fiscal policy has been driven for years by well-designed medium-term expenditure frameworks. Of course, introducing fiscal frameworks on paper is not enough. An equally important aspect is transparency, which allows plans to be scrutinized and ensures that governments can be held accountable for their implementation. In this area, Australia and New Zealand have been leading with their codified transparency requirements. Independent fiscal councils can also play a role.

Reforms to support growth

Third, fiscal adjustment should go hand-in-hand with structural reforms that lay the foundation for sustained productivity and employment growth. Growth will alleviate the daunting challenges of fiscal consolidation, and the task is to find ways of encouraging it without undermining the fiscal position. Reforms in product and labor markets—several countries in Europe are stepping up their efforts in this area—may not yield immediate results, but will over time boost economic growth and lighten the burden of fiscal adjustment. IMF calculations suggest that increasing annual productivity growth by just a quarter of a percentage point could generate a virtuous circle leading to a decline in the public debt ratio of six percentage points within 10 years.

The way forward will be difficult. The fiscal challenges are daunting. It is easy to feel discouraged. But experience shows that rapid improvements are possible.

There is a way forward, but it requires immediate and resolute action on numerous fronts. The Stockholm conference is a small but important contribution to these efforts.

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As Frank Sinatra crooned about love and marriage, so it seems about jobs and growth:

“This I tell ya, brother, you can’t have one without the other.”

The IMF’s latest World Economic Outlook projects global growth of 3 ½ percent this year. To the person on the street, what matters is how this growth translates into jobs and wages. The news on the jobs  front, unfortunately, remains grim.

Five years after the onset of the Great Recession, 16 million more people are likely to remain unemployed this year than in 2007. This estimate is for a set of countries for which the IMF forecasts unemployment rates; adding in some countries for which the International Labour Organization provides forecasts only boosts the number.

The bulk of this increase in unemployed people has been in the so-called advanced economies (the IMF’s term for countries with high per capita incomes), as shown in the chart below.

Why isn’t the jobs picture better?  Quite simply, it’s because the growth picture isn’t very good.

Consider Chart 2, which shows how for advanced economies the change in unemployment rates expected between 2011 and 2012 correlates with the IMF’s forecasts for growth this year.

Countries such as Cyprus, Greece, Italy, the Netherlands, and Spain, where GDP is expected to decline in 2012 are the ones where unemployment is expected to increase this year.

In Iceland, New Zealand, and the United States, where GDP is expected to grow, unemployment rates are expected to decline.

While these declines are welcome, unemployment rates are still expected to remain high in most advanced economies this year.

The average unemployment rate in these economies is expected to 7 ¾ percent, with several populous economies such as the United States, France, the United Kingdom at or above this average.

Policy response

The need to bring down these high unemployment rates is paramount.

That’s why the IMF stated in its recent World Economic Outlook that “the highest priority, but also the most difficult to achieve, is to durably increase growth in advanced economies, and especially in Europe.”

Specifically, policies must be strengthened to solidify the weak recovery and contain the many downside risks.

In the short term this will require:

•  more efforts to address the euro crisis;
• a temperate approach to fiscal restraint in response to weaker activity;
• a continuation of the very accommodative monetary policies; and
• ample liquidity to the financial sector.

(Version in عربي)

Historic transitions in several Arab countries are coming under increasing strain. Domestic uncertainty over the countries’ future course, compounded by the global slowdown and rising oil prices, took a toll on growth in 2011, and the current year will be equally challenging.

A joint and sustained effort is needed to help these countries navigate through this challenging period and set out an economic vision that is fair and inclusive.

Clear risks require strong resolve

The difficulties and challenges facing these countries were very much a focus of discussion during the recent 2012 IMF-World Bank Spring Meetings in Washington. The meetings brought together ministers and top officials from all over the world, with Middle East issues high on the agenda.

There was broad consensus at the Spring Meetings that a strong strategy is needed for the countries to overcome these mounting challenges.

• First, the immediate challenge that many Arab countries in transition now face is to address fiscal and balance of payments imbalances without crowding out private investment. This requires controlling wasteful and untargeted spending, especially on subsidies. But subsidy reform is not easy and it is crucial that adequate social protection is put in place while subsidies are being phased out. In some cases, addressing the balance of payments imbalances will also require allowing for more exchange rate flexibility. And it will be crucial to mobilize external support.
• Second, countries need to define their policy plans that aim at bringing about a job-creating growth that benefits all segments of the society. A piecemeal approach will not suffice to meet this challenge. Reform agendas need to go to the heart of the economic problems of the past that have also fed into the uprisings. This includes ensuring equal access to economic opportunities, promoting transparency, improving access to credit, enhancing the business environment, and reforming the education system and labor market.
• Third, the reform agenda needs to be designed in the respective country and to enjoy broad political support. Economic programs for countries in transition are most likely to be implemented by current and successor governments over 2-3 years. So, broad political support is crucial to strengthen confidence and to implement programs successfully.
• Fourth, the international community, including regional partners, has a responsibility to support Arab countries in transition by providing the necessary financing, market access, and technical assistance to help manage the difficult period ahead.

Regional events

Along with discussions with country delegations, IMF Management also participated in regional and international forums with a focus on the Middle East and North Africa (MENA). Our Managing Director, Christine Lagarde, met with ministers of finance and central bank governors from the region, a good opportunity to listen to their perspectives and issues. In addition, the Deauville Partnership Ministerial Meeting centered on the economic challenges that transition countries are currently facing. We gave our latest macroeconomic assessment on the Arab countries in transition in a background note to Ministers.

IMF Deputy Managing Director Nemat Shafik participated in a seminar on the political economy of subsidy reform, moderated by Al-Jazeera. The seminar focused on the experience of countries from Middle East and North Africa and elsewhere in carrying out spending reform, and particularly subsidies, which in the MENA region are both unsustainably high and inefficient. Speakers who played a key role in subsidy reform in their countries discussed how governments can address the challenges of phasing out universal price subsidies and introduce more targeted forms of social protection, and the lessons that can be drawn for the MENA region.

Finally, we launched a light version of our semiannual Regional Economic Outlook. During the event, I had the opportunity to present to the press and representatives from the region our latest assessment of the region’s economic situation and outlook and to address many questions on the Fund’s engagement with – and challenges faced by – countries in transition.

IMF’s financial contribution

We want to help the Arab countries in transition. In early April, the IMF approved a concessional loan for Yemen, discussions are under way with Egypt for possible financial assistance, we are providing Libya with the needed technical assistance, and IMF staff is in early discussions on financing needs and possible support in a few other cases. We remain ready to support programs that maintain macroeconomic stability, promote inclusive growth, enjoy the necessary broad political support, and include adequate external financing from regional and international partners.

We strongly believe that any reform agenda should be designed and owned by the country. The IMF can provide technical advice and the lessons of experience from across our membership, and we need to ensure that the measures in any country’s economic program are likely to achieve their stated objectives.

But the specific choice of measures is best decided by those who will have to implement the program. To this end, political consensus is crucial to strengthen confidence and to implement programs successfully.

If you needed further evidence about the fallacy of Asia’s economy “decoupling” from that of the developed world, then this month’s Asia and Pacific Regional Economic Outlook would be a good place to look.

The findings in this new report,  just released in the Malaysian capital, Kuala Lumpur, illustrate how Asia’s economic fate remains heavily dependent on events far beyond its immediate borders.

Consider two possible future scenarios to illustrate this ongoing interconnectedness: if global prospects continue to brighten following recent, concerted policy actions in the euro area and, if there are further indications of recovery in the United States, this will all augur well for trade-dependent Asia.   Against this backdrop, the region could enjoy a boost in demand, fresh capital inflows and even a revival of overheating pressures.

But,  were the financial turmoil in the euro area to escalate and spread globally, this would likely result in a sharp fall in demand for Asia’s exports by advanced economies and a possible retrenchment of credit by stressed foreign banks, all of which would be a severe blow to Asia.

Or consider the impact on the region of a geopolitical crisis which pushes energy prices sharply higher.  This would create difficult trade-offs between inflationary pressures and budgetary risks from energy and food subsidies.

Global developments

Consequently, the policies of Asia’s decision makers will likely be largely determined by the direction of global developments.  Under the more positive scenario of  ongoing improved global economic and financial conditions,  and any subsequent rising threat of inflation, the region’s leaders will need to consider renewed tightening and continued normalization of monetary policy in pursuit of sustainable, noninflationary growth.

The fact is, the global outlook underpins any turnaround in Asia and at this point, it could go either way: too early to declare victory over the forces of financial volatility and contagion. The art then is being prepared for either eventuality and policymakers should be ready to shift gears if, and when, circumstances warrant.

If the first months of 2012 are anything to go by, then the outlook is favorable.  Capital inflows into emerging Asia rebounded, stock markets recovered and most local currencies appreciated against the U.S. dollar.  Inflation continued to fall, propelled mainly by the normalization of energy and food prices.  But, a note of caution here, inflation expectations have increased in many countries, while macroeconomic policies remain generally accommodative in the region.

Differing by country

Beyond the immediate fight against inflationary pressures, over the medium-term many countries in Asia need to continue their pursuit of sustainable growth.  How this is to be achieved will differ from country to country.

China, for example, needs to continue rebalancing away from investment-led toward  consumption-led growth.  During the recent IMF-World Bank Spring Meetings, the Vice-Governor of the People’s Bank of China, Yi Gang noted that you only had to stroll through the shopping malls of the country to see consumption in action.  Such continued rebalancing would be good for China and good for the world.

In the case of India, the country would benefit from improvements in the investment climate and  raising its trade integration, whereas for ASEAN economies, public investment in infrastructure—within the framework of medium-term goals—would help attract private investment and promote more broad-based growth.

The task for low-income countries in Asia is to attract foreign direct investment (including from other Asian economies), and so help these countries become part of the Asian miracle.

So yes, Asia’s economic fate remains heavily dependent on events outside its borders.  But another argument for rebalancing (were one needed) is that it would make the region less vulnerable to external shocks.  But regardless of this interdependence, Asia continues to have plenty of space and the power to determine the shape of its economies.

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Here in Washington D.C., Spring is showing its early signs, so we naturally feel a bit more upbeat. But spring comes in fits and starts—a day of sunshine, followed by cold rain, followed by sunshine again. So, we carry an umbrella on sunny days—but also have sunscreen ready.  It’s much the same for most of Latin America and the Caribbean, as we discuss in our Regional Economic Outlook for the Western Hemisphere. So, on a spring day, how do we see things?

Well, before explaining what I mean, let me start with a broad overview.

Most of Latin America stands out from much of the rest of the world—not for great economic performance, but for good performance in a subpar environment. Growth is generally solid, despite a slowdown late last year owing to policy tightening and global volatility. Under our baseline scenario, we expect regional growth to moderate to near 3¾ percent in 2012, down from 4½ percent last year (but modestly up from our January projections).

Some countries will continue to benefit from twin tailwinds of high commodity prices and easy international financing. But others will face weak demand from advanced country partners, or homegrown fiscal problems. And for all countries short-term risks (while receding) still tilt downwards—renewed European tensions or a large oil price shock could hit financial markets and global growth, triggering safe haven flows out of emerging markets, including Latin America.

Umbrella or sunscreen?

The region is quite diverse, so let me focus today on the inflation targeting commodity exporters (Brazil, Chile, Colombia, Peru, and Uruguay), which represent close to 60 percent of the region’s total GDP. These countries have generally fared well, thanks to good economic policy management as well as favorable external conditions—the twin tailwinds. These tailwinds may persist for a while, unless large shocks appear. In fact, even modest-sized shocks would probably not disrupt capital flows into the region for too long.

With this group of economies mostly near or above full capacity, policies need to continue moving to neutral. The stimulus rightly deployed to combat the effects of the 2008–09 financial crisis has been only partially unwound. Indeed, overheating remains a risk—credit and import growth have slowed but are still strong. In particular, continued fiscal normalization is essential—not just to avoid driving an overheating cycle and reduce the burden on monetary policy, but to preserve credibility and make space for a response if downside risks materialize again. The authorities also need to keep in mind that favorable conditions will not last forever, so it will be important to manage the abundance well.

Meanwhile, monetary policy should remain nimble and continue to serve as a first line of defense in case of adverse global shocks. The Lehman and European crises have a common thread—the global propagation of liquidity shocks. We’ve seen the effects of these shocks on our shores—tightening in local markets, including shortages of dollars. While those effects have waned, policymakers need to be alert for droughts punctuating the rainfall, and stand ready to support liquidity in their markets in the short term, as needed.

In these ways, policymakers can carry both an umbrella and sunscreen. Now is not the time to rest easy; nor to try to fight risks that haven’t materialized yet. Instead, rebuilding resilience and flexibility will provide the best bet for continued good economic performance, until the skies clear for good and summer comes.

Let me conclude by noting that this edition of our Regional Economic Outlook features three analytical notes on: (i) how global financial shocks affect output in Latin America; (ii) the real spillovers from the region’s largest economies; and (iii) developments in the housing and mortgage market in the region. These will be discussed in forthcoming blogs.