Assessing Global Fiscal Stimulus: Is the World Being Short-Changed?by Edwin M. Truman | February 24th, 2009 | 09:00 am
International Monetary Fund (IMF) managing director Dominique Strauss-Kahn has called for those countries with fiscal room to maneuver to enact fiscal stimulus packages of 2 percentage points of their respective national gross domestic products (GDP). This is a modest and poorly defined objective. The world needs more ambition and precision.
A more ambitious objective would be to call upon those countries that are in a position to do so to adopt fiscal stimulus programs to boost each country’s real GDP by 2 percentage points in this year and next year. However, the precision problem would remain as is illustrated in the table below.
The table lists estimates of fiscal stimulus measures announced by 20 countries compiled by the IMF and JPMorgan.1 The estimates purport to measure the same thing: discretional changes in fiscal positions as a percent of GDP.
Table 1: Estimates of fiscal stimulus, percent of GDP
|IMF-JPMorgan||JPMorgan as % of IMF|
Several features stand out. There are substantial differences between the two sets of estimates. On average JPMorgan’s estimates are about 20 percent larger, but for 7 countries they are smaller. On the IMF’s estimates only three countries (China, Saudi Arabia, and the United States) come close to meeting the 2 percentage-point criterion. Six countries make it on the JPMorgan estimates (Australia, India, Japan, and Spain, in addition to China and the United States, with no estimate for Saudi Arabia). Although the IMF publication uses purchasing power parity (PPP) weights to measure the total, PPP weights are certainly not appropriate when we are measuring global spending.2 Thus, the bottom line is that the total fiscal stimulus on this measure is between 1.4 and 1.7 percent of the GDP of these countries.
However, the most serious defect of these numbers is that they point toward the wrong target: toward amounts of fiscal effort rather than toward the expected results of those efforts. The amount of fiscal effort is only the first step. The second step is to apply fiscal multipliers to such effort to estimate the impact on GDP.
The IMF document reports these numbers too, using a range of multipliers for three dimensions of fiscal actions: tax cuts, infrastructure investment, and all others. The result for 2009 is a range of 0.4 to 1.2 percent of GDP on a US dollar basis, with a midpoint of 0.8 percent. In other words, the GDP of these countries would be 0.8 percent higher this year than it otherwise would be in the absence of these fiscal packages. These 20 countries account for about 80 percent of global GDP, implying that global GDP would be about 0.6 percent higher without factoring in positive spillover effects.
JPMorgan assumes a higher average multiplier of 1.0 with the implication that world GDP would be boosted by something closer to 1.75 percent. One possible justification for the higher multipliers would be positive spillover effects within the group of 20 countries as well as for the rest of the world. It is not clear whether the IMF staff factored such effects into their calculations. However, if the IMF methodology is superior and accurate, then the world is being shortchanged.
The IMF estimates an even lower average fiscal stimulus for 2010 of about 1 percent, with an estimated effect on growth of only a few tenths of one percent in that year, even after taking account of lags in the effects of policies. Any way you slice the numbers, policymakers are falling short of real ambition in the face of the worst global downturn since the Great Depression.
The IMF management and staff need to be more ambitious in setting a global benchmark. They also need to be more specific about which countries can and should do more. A crude judgment is that the list includes Canada, France, Germany, and perhaps Brazil and Korea, but we need the IMF to make those judgments and tell the world. One important rationale for a coordinated global strategy and the role of the IMF in designing that strategy is to guard against countries’ free riding on the fiscal efforts of other countries and thus exacerbating trade tensions.
1. The IMF estimates come from a note by the staff of the IMF to the Group of Twenty Deputies meeting on January 31—February 1, 2009, available on the IMF website (www.imf.org). The JPMorgan estimates come from “Priming the Pump” a special economic research report dated February 13, 2009.
2. Actually, when we recalculated the total for the IMF estimates for individual countries, we got 1.4 percent using either US dollar GDP weights or PPP weights.