Experts from the IMF, the OECD, and the World Bank met on 4 February in Paris to exchange views and co‑ordinate responses to the global economic crisis. OECD Secretary-General Angel Gurría launched the discussions, which were led by Carlo Cottarelli, Director, Fiscal Affairs Department, IMF; Danny Leipziger, Vice President, Poverty Reduction and Economic Management Network, World Bank; and Pier Carlo Padoan, Deputy Secretary-General of the OECD.
Following an earlier meeting in September 2008 to consider the impact of the food and fuel crises on developing countries, the day-long consultations were part of the ongoing initiative to enhance inter-institutional co-ordination on pressing economic policy issues.
Discussions centred on the policy challenges posed by the deepening global financial turmoil and economic recession. Experts considered the implications of the evolving crisis for macroeconomic, fiscal, and social policy making in both advanced and developing countries, along with the priorities for regulatory and supervisory reforms.
In examining the crisis, a number of common concerns emerged, including about new vulnerabilities as the crisis affects emerging and developing economies more deeply.
In light of these dramatic challenges to the international community, experts discussed possible directions for action.
1. There is an urgent need to restore market confidence in the financial sector and stimulate the real economy; efforts on these two fronts must be pursued simultaneously and in a mutually reinforcing way in order to increase their impact on the real economy.
Despite large infusions of public funds into financial sectors in affected countries, market confidence has yet to be restored. Restoring banks’ capacity to lend is essential to put economies back on the path to growth. Efforts to remove or isolate toxic assets must be stepped up in order to enable a sustainable recapitalisation of banks and a timely end to the credit crunch. Regulation, supervision and tax policy also need to be reviewed, and upgraded where necessary, to avoid a return to the unhealthy incentives and excessive leveraging that precipitated the crisis.
In parallel, there continues to be an urgent need for fiscal stimulus. The size and composition of fiscal packages should be consistent with each country’s fiscal space and institutional capacity. The deepening of the downturn suggests the need for an increase in high-impact fiscal expenditures in the first half of 2009, with further support in the following quarters, by countries in a position to prudently undertake such spending. At the same time, embedding stimulus packages in a credible medium-term strategy that safeguards fiscal sustainability will also increase their impact in the short term. Due attention should be given to longer-term policy perspectives, including consideration of how stimulus policies could work to serve the objectives of climate-friendly and innovation-enhancing investment.
On both the financial and economic fronts, a strategy for an effective exit from short-term support will be needed, along with transitional measures.
Stronger co-ordination among those countries taking financial and economic measures would maximise impact, increase the effectiveness of demand-boosting measures, and avoid beggar-thy-neighbour effects. Looking ahead, broadening the coverage of regulation and supervision to the non-banking sector will also be necessary to avoid a recurrence of the regulatory competition – and resulting lowest common denominator regulation – which played an important part in the crisis.
2. There is a need for continued vigilance by governments against trade and investment protectionism. There has been a disturbing drop in trade volumes, exacerbated by the rising cost of trade finance. Furthermore, a drop in capital flows would signal a significant disruption in the traditional reliance of emerging and developing economies on foreign direct investment.
Nations would be hurt by the introduction of protectionist policies into their crisis packages, which would act to slow the global recovery. Efforts should also be made to ensure that financial support and stimulus measures are designed so that they do not impact negatively on competition.
3. There is deep concern over job destruction in all economies, along with the impact of the crisis on pension and health-care financing. In the face of rapidly mounting unemployment, experts underlined the need to support human capital formation and to avoid policies that would undermine recent reforms or reduce the labour supply. Resources for unemployment and market intervention will have to be managed effectively. Efforts should aim to reinvigorate private sector activities and ease entry of new firms, including by facilitating access to credit, particularly for SMEs and innovative firms.
Experts underscored the need for measures to counter projected declines in income for the most vulnerable households, which threaten development gains, and risk creating millions of new poor. Priority financing and technical assistance should be made available to those countries undertaking targeted interventions to create employment, augment existing safety nets, and ensure basic service delivery for vulnerable populations.
The impact of the evolving crisis on emerging and developing economies should be monitored closely. Additional external financing and resources from donors for the most-affected and poorest countries should be a priority, especially in the light of reduced capital inflows for infrastructure and strains on the budgets of these countries which have been deeply affected by, but not responsible for the crisis. All available instruments of the international community should be considered in this regard.
4. International fora and multilateral institutions should be mobilised to improve the collective impact of policy responses, restore confidence and pave the way for a post-crisis regulatory architecture characterised by enhanced co-ordination. There is a need to find common ground on which to base the new architecture. The IMF, OECD and World Bank will continue to work together to share best practices and help governments find solutions to these challenges.