Keynes Goes Global: Anticipating the Global Slowdown

12 september 2019

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

Resume: As the world economy shows mounting signs of deceleration and recessionary fears intensify across global markets, the world community is likely to focus increasingly on how to undertake an effective anti-crisis response.

As the world economy shows mounting signs of deceleration and recessionary fears intensify across global markets, the world community is likely to focus increasingly on how to undertake an effective anti-crisis response. Back in 2008-2009 one of the key factors in surmounting the crisis was a coordinated response of the largest economies via a fiscal stimulus that was coordinated by the IMF. In current circumstances the conditions for effective cross-country coordination may appear to be more challenging, but nonetheless the worsening condition of the world economy does merit a look into how the global anti-crisis response can be undertaken. 

  The coordinated global response to the 2008-2009 crisis was unprecedented in terms of the scale and synchronicity undertaken by countries. According to the International Labour Organization (ILO), “among the G20 countries alone, the size of fiscal stimulus amounted to $2 trillion – roughly 1.4 per cent of the world GDP. More importantly, the response to this crisis stands out because of the synchronicity among major economies on all fronts – financial, monetary, and fiscal responses” . 

The scale of the anti-crisis response varied widely across countries, with Asia (without Japan and South Korea) allocating more than 9% of GDP – the highest across macro-regions. Among the G-20 economies China led the way with 12.7% of GDP in anti-crisis stimulus, followed by Saudi Arabia, South Korea, Turkey and the United States. The conclusion reached by the ILO in its analysis of the anti-crisis response was that the “evaluation of country efforts reveals that countries that showed relatively better GDP and employment recovery also had implemented bigger stimulus packages as a percent of GDP. Countries in emerging Asia and other developing economies tend to fall in this category” .

There was significant variation across countries in terms of the composition of the fiscal stimulus, with developing countries such as China and India directing the bulk of anti-crisis spending towards infrastructure projects. In advanced economies more emphasis was placed on lowering the tax burden in the economy and increasing social transfers and unemployment benefits. Unemployment benefits featured as an important part of the anti-crisis tool-kit partly due to their role as “automatic stabilizers” (increasing during the recession and falling back along with the recovery). On the whole the issue of the composition of the global fiscal stimulus package that could be put together in the near term needs to take into account the multiplier effects as well as the spillover effects of fiscal spending across countries and regions in the 2008-2009 undertaking. 

  Interestingly, Russia’s fiscal stimulus within the coordinated response was one of the least sizeable, with a significant part of the post-crisis recovery taking place on the back of the growth in oil prices. This time around Russia is in a relatively favourable position to deliver its share of stimulus:   

 

  •   The exceeding of the 7% of GDP benchmark for the National Well-being fund, beyond which funds in excess of the limit may be spent

  •   The catch-up in the disbursement of funds for National projects, whose financing has been running behind schedule throughout 2019

  •   Introduction of KPIs and greater conditionality in the allocation of funds to the regions, which raises the state’s capacity in undertaking targeted spending

  • Strong sovereign balance sheet characterized by fiscal surpluses, a moderation in the level of the non-oil budget deficit and low public debt levels

  • Electoral cycle: in 2020 Russia effectively enters into a pre-electoral period, which according to previous electoral patterns may raise the propensity of the authorities to allow for greater fiscal loosening

  • Low growth amid a relatively tight macroeconomic policy mix, with the scope for monetary policy loosening limited

 

Overall, a fiscal stimulus coordinated across countries appears to be increasingly expedient as the intensity of the trade stand-off among the leading trading powers is showing further signs of escalation. Rather than an ad hoc response from a number of countries a decade ago a more comprehensive, rules-based and coordinated arrangement could be advanced in a way that renders this anti-crisis mechanism a systemic part of an effective use of the Global Financial Safety Net (GFSN). Indeed, in order to magnify the synchronicity effects of the fiscal spending at the country level, other layers of the Global Financial Safety Net could be employed, namely the stimulus coming from the regional and global development banks/institutions as well as Regional Financing Arrangements (RFAs). 

With Keynesian recipes largely employed to deal with crises at the country level it is about time that Keynes’ theory stands up to the global challenges facing the world today. A rising number of countries are now opting to use the instrument of expansionary fiscal policy to avert an economic downturn, including possibly the likes of Germany where there is a strong preference not to deviate away too far from balanced budgets. What is needed in current circumstances is an effort to coordinate these fiscal stimuli and advance a framework for an anti-crisis response at the global level – an undertaking in the true spirit of John Maynard Keynes, whose legacy may largely be summed up by his advocacy of anti-crisis policies (fiscal stimulus) and international coordination (the creation of the Bretton Woods institutions). 

Valdai International Discussion Club

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