A article by ODI’s Dirk Willem te Velde argues that the G20 should consider a global fiscal stimulus, ‘with a significant part for early disbursement to poor countries‘. Growth revisions made by the IMF up until February 2009 calculated losses of more than $50 billion in Sub-Saharan Africa and $750 billion in developing countries as a whole. Few developing countries can afford the kind of fiscal stimulus needed to ‘address a crisis originating from the developed world’, despite the fact that many developing countries possess larger reserves than they may have done previously. Willem te Velde argues that a ‘rainbow’ coloured set of stimuli should be implemented to help the developed and developing world cope with the recession. Blue – represents market forces, green environmental considerations and red – Keynesian state intervention.

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1) The blue:

Accelerating support for the private sector (on the supply side) by creating an appropriate framework for investment. Investing in infrastructure. However, to ensure that the outcomes are desirable and socially beneficial, global trade rules need to be implemented.

2) The green:

Implement green stimulus to correct the significant market failure that the price of energy does not reflect the cost of its environmental externalities. If this were to change, trade and growth strategies would not exacerbate climate change and might contribute to positive changes to help meet the urgent and necessary CO2 emission targets. Secondly, there are information-related market failures relating to the adoption of  green technology and technical change.

Further stimulus could go to measures to ‘help people adapt to the realities of climate change’.

3) The red:

Market intervention – inject finance into the economy to stimulate consumption and demand. This could stabilise the macroeconomic situation in the short-term. These could include tax reductions of government transfers or public investment support for growth orientated policies.

Willem te Velde claims that developed countries should have significant interest in supporting this fiscal stimulus for developing countries. Firstly because the crisis originated from the developed world. Secondly because growth in the developing countries has contributed a great deal to previous growth in the developed – for example through China’s large importation of goods and services from developed countries. The flip side of this argument is what hurts the developing world will exacerbate the crisis for the developed world. Not supporting developing countries, when they do not have the resources to implement such fiscal stimulus, may encourage a ‘beggar thy neighbour’ or a protectionist attitude to be adopted by the developing world, which may further negatively affect the developed world.

How much is needed?

The IMF believes that 2% of GDP could be enough and WIllem te Velde believes much more needs to be given to Aid for Trade and for investment in infrastructure.

What is clear, I think, is that the economic crisis is very much a global one and will require a global solution. Although the temptation exists for countries to retreat inwards and concentrate on their own, erecting invisible, but very real walls, this will achieve very little in the long run and is likely to lead to protracted decline.

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