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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
     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
     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:
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MNI Washington Bureau | +1 202-371-2121 |

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