Prime Minister Manmohan Singh has articulated the consensus view at the Toronto meeting of the G20 economies that produce nearly nine-tenths of the world’s output. His call for a country-specific approach to winding down expansionary fiscal policies undertaken after the 2008 meltdown has been endorsed by the group. Coordinated pump priming had its merit — the world managed to spend itself out of the biggest slump in nearly a century — but a synchronised exit risks jeopardising the fragile global recovery. In the event, the summit did set out deficit reduction targets for the advanced G20 countries, but allowed national governments the freedom to decide on the pace.
G20 countries committed nearly $2 trillion to stimulus measures immediately following the financial crisis, which, an International Monetary Fund (IMF) study reckons, could add 1.2-4.7 percentage points to the bloc’s output in 2009 and 0.1-1 percentage point in 2010. But this process is not painless — the public debt in the G20 will climb from 62 per cent of its GDP in 2007 to 82 per cent in 2010. The cost of servicing this debt is vital in decisions to roll back fiscal stimuli. Premature withdrawal of government spending risks nipping the recovery in the bud; on the other hand, if governments continue to pump more money than is needed, rising interest rates will undermine whatever revival has been achieved. Since countries are at different points on the turnaround graph, fiscal rollbacks must occur at different times. When they do, they will have to be large: to regain its 2007 position, the world needs to bring down its fiscal deficit from 7 per cent to under 1 per cent, a process, the IMF paper says, that could drag on beyond 2016. The Toronto meeting threw up two dates: 2013, by when the advanced economies will try to halve their deficits; and 2016 by when they should begin to stabilise their public debt ratios.
Mr Singh’s second point about developing countries adjusting to the new reality of softer demand in the advanced nations is a theme being played out in think-tanks across the globe. According to the Organisation for Economic Cooperation and Development, emerging economies are holding $5.4 trillion in foreign currency reserves, nearly twice as much the amount held by rich countries. This amount represents the consumption the developing countries have forgone in their effort to flood the West with cheap goods. Mr Singh has offered a way out by suggesting emerging economies allow their currencies
to float in transition to a greater share of domestic demand for their output. The onus on the rich nations is to keep capital flows intact during this transition.