The stabilisation of financial markets and stimulation of the global economy will require unprecedented policy co-ordination among the world’s political leaders in 2009. Failure to co-ordinate in this way will slow recovery and reduce the aggregate impact of the stimulus packages being contemplated or implemented by individual governments. Worse, fragmented actions could yield incrementally to “beggar thy neighbour” policies that run the risk of accelerating rather than ameliorating the crisis.
The International Monetary Fund estimates the global economy needs a fiscal stimulus of at least 2 per cent, or $1,200bn (€882bn, £798bn), in 2009 to ward off the worst effects of the crisis. Economists acknowledge that much more may be required if shattered confidence sets off a spiral of deleveraging, declining asset values, falling income and rising unemployment.
Some action has been taken by individual governments through both monetary policy and significant fiscal stimulus announcements. The truth is much of this will not be delivered in 2009 but in later years. Also, some of the fiscal stimulus measures that have been announced are reannouncements and therefore unlikely to have any additional effect on growth projections. Individual national measures, meanwhile, will not capture the benefits of co-ordinated international action.
Such benefits are significant. First there are real and psychological gains. Stimulus measures from one country spill over to their trade partners, creating an additional boost. Co-ordination is also important to mitigate the volatility in currency and bond markets that can be an unintended consequence of uncoordinated policies.
Second, co-ordination is an important defence against beggar-thy-neighbour policies. We are already beginning to see worrying early forays into protectionism. The number of anti-dumping cases rose by 40 per cent in the first half of 2008 and there has been a gradual creeping up of tariffs. Even within their World Trade Organisation commitments, there is scope for countries to raise tariffs. If all nations put up tariffs to their bound rate (the highest rate consistent with their WTO commitments), exporters from middle and high income countries could face tariffs twice as high as current levels. Then there is the remaining challenge of concluding the Doha round – where lack of progress represents a continuing failure of global political will.
Third, international co-operation is essential because this crisis has important implications for developing countries. They did not create this crisis but have been badly damaged by it. The global recession in advanced economies has weakened export opportunities for emerging countries. In addition, the financial crisis has restricted credit flows – with spreads on debt to developing countries having widened significantly. This means many developing countries will struggle to finance their existing deficits, let alone fund the kind of fiscal rescue packages being contemplated by developed economies. Loans from multilateral development banks to developing countries totalled $41bn in 2007. This needs to be significantly increased across the board consistent with the World Bank’s recent decision to quadruple its lending. Aid must be increased, currency swaps need to be extended and the IMF must expand the scope of its short-term liquidity facility.
A fourth reason for co-ordinated action is the unprecedented opportunity the crisis presents to combine shorter-term stimulus requirements to boost growth and employment in 2009 with the longer-term requirement to lift global productivity growth and accelerate the transformation to a lower-carbon economy.
The development of a global response to this crisis is a complex task. The good news is that the Group of 20 summits in Washington last November and in London this April will have created a mechanism for effective, co-ordinated action – bringing together for the first time the main developed and developing economies, which represent between them 85 per cent of gross domestic product, 80 per cent of world trade and two-thirds of the world’s population.
In the immediate period ahead, G20 governments will need to work out the quantum of stimulus necessary for 2009 to offset the anticipated contraction in the private economy and the consequential impact on unemployment; to agree on the optimal content of stimulus policies to balance short and long-term economic needs; to co-ordinate the implementation of these measures; and to develop a medium-term exit strategy to ensure that surviving this crisis does not shackle us with long-term inflation.
All these measures will require unprecedented co-operation among governments. If we fail, the consequences will be grave. If we rise to the challenge, not only will we reduce the impact of long-term unemployment, but we will also have begun to fashion a new form of economic governance that the underlying forces of globalisation have long been calling forth.
The writer is Australia’s prime minister
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