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

Cooperation among the world’s leading economies has been crucial to this success. IMF estimates showed that up to one-third of the boost to global growth expected from fiscal stimulus will reflect positive spillover effects.  This reflects a kind of virtuous circle—with policy stimulus in one country helping growth in another, and so on—that is the opposite of the dire policies that spread misery during the Depression era.  Policymakers showed they had learned the lessons of the 1930s.

up to one-third of the boost to global growth expected from fiscal stimulus will reflect positive spillover effects (photo: Norbert Millauer/AFP/Getty Images)

Up to one-third of the boost to global growth expected from fiscal stimulus will reflect positive spillover effects (photo: Norbert Millauer/AFP/Getty Images)

Fiscal stimulus, cuts in interest rates, and steps to repair financial systems are working.

So far so good.  Economists widely called for these extraordinary measures, helping the profession to redeem its poor record in the runup to the crisis. But the question now is how to generate—and then foster—a strong and sustainable recovery.  And the answers there are less clear—or at least there is less consensus.

When and how should monetary stimulus be unwound? How should governments and central banks adapt their unprecedented support to the financial system, as fears of collapse ebb, but uncertainties about future loan losses remain? How should short-term needs for fiscal support to demand be balanced against looming deficits in the medium term in some countries?

What does seem clear is that as countries grapple with these choices, cooperation among them will remain crucial. Restoring sustainable growth will require a rebalancing act as well that complementary policies in different countries need to support.

As far as financial reforms go, cooperation is also critical. As the GFSR update last month noted, “maintaining consistency of policies across countries [is needed] to minimize the opportunities for regulatory arbitrage and adverse financial flows.” Within countries there is already a challenge, given the range of authorities and varying mandates involved. Across countries, the challenge of coherence and consistency is greater, but the stakes even higher. 

Work at the IMF on these issues is under way. We will be sharing our analysis in coming weeks.

One Response

  1. The way forward is going to be difficult.
    France, Germany and Japan, like China (now returning to 8% growth) are now coming out of recession and want an exit strategy from the stimulus programme.
    The UK and US do not, they were under most fiscal pressure, but Governments will not be able to prop up their economies for ever, so the stimulus programmes will have to end.
    The IMF faces a big challenge of its own.
    It will have to accept more countries will have more say
    It will have to look more carefully at the loans and assistance it gives to countries, ensure the countries adhere to letters of settlement, and details of implementation are factual, it can not just give out money to countries as if it was a charity, and rely on donor countries to contribute money to make up any shortfalls in its coffers.
    (In my last blog I criticised the fact it seemed to be just giving tranche’s to countries like Ukraine, without ensuring the country adhered to its letter of settlement.
    Now even the Ukrainian presidential secretariat has stated that Ukraine is not only failing to comply with the obligations it had given to the International Monetary Fund, but is misinforming the fund about their implementation)

    The biggest question facing the IMF is that is going to have to reshape itself to reflect the growing economic power of China and other emerging markets, countries like Brazil, who is now also reportedly out of recession, and India.
    The voting rights of some European countries will have to be reduced to give more voting rights to these and other countries.
    The objections of the UK, Italy and some of the other “rich countries” must be ignored.
    The UK and Italy and certain other countries must accept they can no longer be considered as one of the rich countries.

    At their last meeting the G20 finance ministers avoided the tough questions of how to give more voting power to the BRIC countries at the IMF, by not tackling this problem and continuing there rivalries the “old guard” are demonstrating their refusal to recognise that there is now a new international economic order.

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