A multi-speed recovery

As the world continues to slowly and painfully recover from the economic recession the dominant question is, without fiscal stimulus, what policies can stave off a double-dip recession? The G-20 is trying to address such predicament as well as global governance in a world that is in need of better coordination on international politics. While the G-20 is not what it could be, their meetings provide clues to their concept of global politics and its implications. The group’s recent conference in Busan, South Korea was followed by a communiqué containing two key points.

First, the communiqué confirms the G-20 position regarding the “key” governmental role “in restoring growth” while also reaffirming that “the members are willing to safeguard the economic recovery and strengthen growth prospects and employment …” This statement should provide some degree of comfort to international markets.

Second, the report notes that we live in a multi-speed world characterized by more than large differences in growth rates; there are also massive differences in the soundness and sustainability of public finances in individual countries. Yet the document makes no significant progress in providing a unifying view for the increasingly contrasting and uncoordinated national policy approaches.  Furthermore the G-20 has gone from strongly supporting financial package, to recognizing that the current strategy failed to create the economic recovery rate that was required. The strategy’s collateral damage is represented in the form of increasingly unsustainable deficits and that this situation illustrates the limitations of policy and strategy based on the short term gains.

For the moment, according to Antonio Prado, CEPAL deputy secretary general, Latin America is gaining speed relative to other regional economies. In Prado’s words: “instability in the U.S. and the EU will have an impact on the region; however the Latin American and Caribbean economies will grow above the world average.”

Countries in the region that applied prudent fiscal and monetary policies have emerged from the crisis in good standing. As the global economic recovery progresses, however, they will face issues dealing with heavy capital inflows in the coming years. The challenge will be to prevent the accumulation of weaknesses in the economic system while efficiently absorbing the influx. Policymakers will have to judiciously use a range of tools including, currency appreciation, accumulation of reserves, and a tighter fiscal policy, among other measures. Regional leaders have to also worry about the delicate balancing act that is removing the fiscal stimulus out of the economic system. If the stimulus is eliminated ahead of time the sustainability of the recovery will be in danger, nevertheless, if the subtraction is delayed, it may well plant the seeds for the next crisis.

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