IMF Staff To G-20: Joint Action Leads to Better Outcome

--Demand, Inflation Still Below Target in G-20 Countries

--Coordinated Fiscal Stimulus Could Be Tool in Next Crisis

By Kevin Kastner

     WASHINGTON (MNI) - An IMF staff report suggests that G-20 countries work

together to promote balanced and stronger growth -- and soften any shocks that

may come along, as seen with the global financial crisis.

     The staff report, which was prepared at the G-20's request ahead of next

week's meetings in Washington, reflects only the opinions of the IMF staff, not

the IMF leadership or the G-20 itself. But it provides some prescriptions for

what the world's largest economies should do going forward to take advantage of

the current expansion to prepare for the future.

     The report acknowledges that the G-20 has progressed a long distance toward

the goal it set post-crisis for "strong, sustainable, and balanced growth."

However, it suggests that the goal has not been entirely reached.

     Since the crisis, cyclical recovery has continued, raising employment and

lowering unemployment rates. At the same time, potential growth has improved as

the decline in productivity growth has slowed. And finally, global imbalances

have moderated, the report shows.

     However, the report notes that demand and inflation both remain below

target in a number of G-20 countries. In addition, productivity growth remains

tepid and imbalances remain. Debt levels are also higher, particularly among

advanced economies.

     The report suggests, in approaching these lingering issues, that joint

action promises the best outcome. The report acknowledges that monetary policy

remains "appropriately accommodative" in the advanced economies, which it

suggests helped mute the impact of the crisis.

     The report singled out the United States, noting that it is reaching full

employment. The report suggested that the pace of policy normalization "should

continue to be gradual and data-dependent, alongside well communicated plans for

the Federal Reserve's balance sheet."

     On fiscal policy, however, the picture is more mixed. The report suggests

there is room for continued high fiscal support in Japan and Germany, with the

latter's excess current account surplus trimmed as a result.

     At the same time, the report acknowledges that in countries such as the UK

and the U.S., fiscal support is expected to be drawn down sooner as appropriate

to give way for fiscal sustainability. Fiscal consolidation in these countries

would be expected. 

     This fiscal prudence can also applied to private debt, reducing

overleveraging and bank liabilities.

     The priority for the advanced economies, the report indicates, is to lift

productivity and employment through easing product market regulations and

reducing some taxes that would be offset in other ways. 

     As for emerging economies, the report's authors suggest liberalizing trade

and tax structure reform. In particular, the report suggest China "continue

increasing the role of market forces to improve resource allocation" and reduce

barriers to imports.

     In addition, the report suggests the G-20 countries give attention to

climate change, noting that small countries are greatest at risk of weather

shocks and that international support is needed to support these countries.

Likewise, changes are needed to stem the man-made issues related to climate

change.

     The report notes these changes should lead to stronger G-20 GDP growth in

the medium-term and long-term horizons, with some benefits also appearing in the

short-term. The fiscal and monetary policy changes suggested are most effective

when they are not done in a vacuum.

     The report said that "about half of the increase in the level of GDP

generated in advanced economies stems from the fact that all countries are

implementing the recommend policies simultaneously, which benefits global

trade."

     The result of acting at the same time would be more balanced growth,

particularly in China due to a shift toward more private consumption. In

addition, developed countries would see stronger domestic demand and improved

net export gaps.

     There would also be reduced debt levels in deficit countries and higher

debt levels in surplus countries. 

     The outcome, according to the report, would be more sustainable growth.

     The report calls for the countries to act together in times of crisis

through coordinated fiscal stimulus. At the same time, it cautioned against

protectionist policies that threaten global trade. The result of high tariffs,

it said, would be a reduction of consumption and investment, followed perhaps by

global uncertainty and financial volatility. 

--MNI Washington Bureau; tel: +1 202-371-2121; email: kevin.kastner@marketnews.com

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