2010 Outlook: New Year, New Decade, New Challenges


By John Lipsky

The year 2010 has opened amid generalized—–but tempered—optimism about the global economic and financial outlook.

 The unprecedented scale and scope of the anti-crisis measures taken during the past year—and the unprecedented degree of multilateral policy coordination involved in their design and implementation—appear to have succeeded in averting a downturn of historic proportions.

 The improved prospects are evident in economic data, in financial market performance, and in the marking up of economic forecasts. In fact, somewhat more upbeat expectations no doubt will be reflected in the regular January update of the IMF’s World Economic Outloook forecast.

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This Time Is Different—Fiscal Policy in Low-income Countries


By Carlo Cottarelli

When it comes to the crisis, most of the media attention is focused on advanced and emerging market countries. But low-income countries have been badly hit too, reflecting their growing integration in the world economy. We can see sharp declines in exports, FDI, tourism, and remittances. Output growth in 2009 will be less than half of the pre-crisis rate of over 5 percent. Sub-Saharan Africa is the worst affected, with a contraction of real per capita GDP of almost 1 percent.

This is the bad news. But there is some good news in all of this. Low-income countries have been able to use fiscal policy as a countercyclical tool this time around, far more than in the past. Fiscal deficits are expected to increase in three-quarters of low-income countries in 2009, with an average expansion of 3 percent of GDP. Revenues have grown slower than GDP, reflecting the disproportionate impact of the crisis on trade and commodity revenues, as well as weakening tax compliance. Expenditures are expected to increase by about 2 percentage points of GDP.

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Post-Crisis: What Should Be the Goal of a Fiscal Exit Strategy?


By Carlo Cottarelli

One obvious fallout of the global financial crisis is a huge deterioration in fiscal conditions, particularly in advanced countries. The numbers are nothing short of staggering. Gross general government debt in the G-20 advanced economies is projected to approach 120 percent of GDP by 2014, up from about 80 percent in 2007, and this is even assuming no renewal of fiscal stimulus beyond 2010.

Some might think that this comes from an “exotic” form of fiscal policy whereby governments opened their coffers to prop up financial institutions. But only a small part of this debt spike is matched by a rise in financial assets. It really boils down to “plain vanilla” deficits—revenue losses from the recession, fiscal stimulus, and some underlying spending increases that would have occurred even without a recession.

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Why Did Latin America Do Better in This Crisis? The Benefits of Being Prepared


By Nicolás Eyzaguirre

(Version en español)

Although this time the external shocks were very strong in this year of global crisis, the Latin American and Caribbean (LAC) region has performed notably better than in the past, and also better than many other emerging market countries.

This improvement can be attributed to the fact that the region faced the crisis equipped with economic policy frameworks that were more solid and credible than in the past, and with smaller financial, external, and fiscal vulnerabilities. This allowed a number of countries of the region to implement countercyclical monetary and fiscal policies.

Figure 1 shows a measure of the benefits that this better preparation has brought. It compares the fall in average growth of GDP actually observed in Brazil, Chile, Colombia, Mexico, and Peru (solid line) with our best estimate of the decline that would have occurred if their policy frameworks and vulnerabilities had not been changed (dashed line). The estimates here suggest that these countries were able to “save” about 4 percentage points of GDP during the crisis, thanks to their better preparations for confronting external shocks.

Eyzaguirre1021Ch1

Figure 2 shows that various countries of the region had the room or “space” to apply countercyclical fiscal and monetary policies during this crisis. The figure depicts changes in interest rates (vertical axis) and in fiscal deficits (horizontal axis) for each country of the LAC region, where the colors group countries according to certain general characteristics and the diameter of the circles represent the relative size of each economy.

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IMF Annual Meetings – Key reports out


The IMF has just published its latest forecast for the global economy, the World Economic Outlook. After a deep recession, global economic growth has turned positive, driven by wide-ranging, coordinated public intervention that has supported demand and reduced uncertainty and systemic risk in financial markets, according to the report.

“The recovery has started. Financial markets are healing,” says IMF Chief Economist Olivier Blanchard. But he warned the recovery will be slow. “The current numbers shuld not fool governments into thinking that the crisis is over,” he said.

The Fund also published its Global Financial Stability Report.  It also sees a recovery, but much more needs to be done to heal the international financial  system, including repairing bank balance sheets. Read the IMF Survey story.

 

High-Stakes Choices In Next Stage of Crisis


By Caroline Atkinson

After averting a second Great Depression, what should policy makers do to foster recovery?

Economic policymakers are rarely popular. Central bank governors are notorious for removing the punch bowl at the party. Ministers of finance are traditionally the ones who say no to their colleagues’ pet spending projects.

In the upside-down world of recent months, finance ministers and central bank governors around the world seemed to have switched sides.  They became cheerleaders for expansionary policies. The IMF has argued strongly for this, as long as countries had room to take on more debt. Despite some hiccups, it seems clearer with every economic release that the extraordinary actions governments have taken have paid off, at least in halting the slide. Economic prospects may not be quite as bright as recent market moves would suggest. But the risk of spreading financial collapse has lessened markedly

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