A “Synchronized Downturn” Calls for a “Synchronized Response”
Valdai Papers
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Yaroslav D. Lissovolik

Programme Director at the Valdai Discussion Club, Member of the Government Expert Council

Valdai Discussion Club  

This year’s Annual meetings of the IMF and the World Bank in Washington DC revealed a growing preoccupation with the mounting signs of a slowdown in the world economy. The IMF’s diagnosis was that of a “synchronized slowdown” across the globe with the Fund revising its growth projection for global economic growth downwards and putting the 2019 growth estimate at the lowest level since the 2008-2009 financial crisis. Indeed, the discussions in the seminars and conferences during the Annual meetings featured various proposals on ways of countering the further progression of the global economic slowdown. While structural reforms were frequently advanced as the preferable path to boosting the economic growth potential, the short-term exigencies for the global economy invariably centered on the need to deliver a monetary and/or fiscal stimulus to support growth.

The first time a coordinated attempt at delivering a fiscal stimulus across countries was undertaken to counter the effects of the 2008-2009 financial crisis. And while the results of the stimulus are generally viewed positively, there is sizeable potential to further improve on the delivery of the stimulus and its impact on global growth. This may involve a shift in the composition of coordinated spending towards more growth-enhancing spending items such as infrastructure development. It may also involve coordinated structural measures (including possibly in the sphere of trade or investment liberalization through plurilateral or other types of agreements) that may seek to amplify and reinforce the positive cross-border effects of fiscal stimulus.

Another important aspect of a superior anti-crisis framework across the globe is a transparent, rules-based and pre-established mechanism for a coordinated stimulus rather than an ad hoc mechanism that is undertaken by a relatively narrow group of heavy-weights in the midst of a downturn. The impact of an ex-ante, pre—arranged framework will arguably be stronger with respect to stabilizing the expectations of markets as well as the business/investor and consumer confidence compared to an absence of a well-defined framework beyond the mechanical summing up of disparate country-level anti-crisis efforts. Furthermore, such an anti-crisis framework that would serve as a “global anchor” of sorts would also need to incorporate a coordination mechanism for monetary policy stimulus across countries and its interaction with fiscal anti-crisis measures.

But perhaps the most important way in which a coordinated fiscal stimulus could be improved would be through the involvement of regional institutions such as regional development banks as well as the regional integration arrangements. The involvement of the regional development banks as well as the Regional Financing Arrangements (RFAs) is warranted by their sheer size – in terms of available resources regional development banks vastly exceed the fire-power of global institutions such as the World Bank, while the resources of the IMF have also been surpassed by Regional Financing Arrangements in recent years. Accordingly, the use of regional institutions in a coordinated effort to support global growth impulses enables the world economy to make use of a greater part of the Global Financial Safety Net (GFSN) that may be employed to support growth.

In fact one of the key objectives of the GFSN is precisely to provide the funds/liquidity to cope with the crisis along with supplying the funds that may serve as precautionary insurance against outbreaks of economic instability. The four layers that constitute the GFSN include the country-level (countries’ fiscal and monetary reserves), bilateral level (bilateral swap lines across countries), regional level (regional financing arrangements) and the multilateral level represented by global institutions such as the IMF. The importance of the regional layer resides in the multiplier potential of economic stimulus across borders and the greater scope for using the institutions and the arrangements devised at the regional level to prioritize these positive cross-border spillovers.

Another regional dimension with respect to the global fiscal stimulus has to do with the coordination of this exercise with regional integration arrangements such as the EU, ASEAN or the Eurasian Economic Union. This is due to the significant capability that regional institutions possess in tracking intra-regional spillover effects as well as their experience in promoting economic policy coordination within their respective regions. It is also important to take advantage of the regional transmission mechanisms that have been developed within the regional integration arrangements and development institutions. This includes portfolios of “integration projects” financed by regional development banks in which the effects of infrastructure or other spending are to be spread across a wider array of regional partners whose economic integration is promoted by the respective regional development institutions.

The creation of an anti-crisis mechanism at the global level may become part of a broader task that targets the reconstruction of the global economic architecture through the incorporation of a regional layer of global governance. This in turn may be pursued via the creation of a platform for regional integration arrangements and regional institutions with a coordinating role performed by the G20. Such a platform that may be denoted R20 (regional 20) would bring together regional integration arrangements and institutions where G20 countries are leading members. Such a platform may promote horizontal coordination across regional institutions as well as vertical cooperation with global multilateral organizations – Regional Financing Arrangements with the IMF, regional development banks with the World bank and the regional integration arrangements with the WTO.

In the end, a synchronized downturn calls for a synchronized response. Limiting the coordinated fiscal response solely to the country level significantly restricts the scale of resources that may be devoted to fiscal stimulus at the global level. There needs to be an ex-ante mechanism that allows for a coordinated response across all layers of the Global Financial Safety Net and the use of an entire array of reserves and resources to deliver the stimulus. There is also a need for such a mechanism to incorporate the possible modalities of structural measures and monetary stimulus that could further strengthen the global anti-crisis response. For all the merits of the previous global anti-crisis exercise, its effects proved to be short-lived, while a significant part of the imbalances in the structural area proved to be way too resilient.

The Valdai Discussion Club