Sunday, March 22, 2009

It's All About the Policies, Says the IMF

Sources: IMF Survey, Advanced Economies to Contract Sharply in 09; The London Summit 09, World Leaders to Use Final 10 Days to Push Summit Outcomes from Good to Excellent;

On March 19th, the IMF made public its newest study regarding global economic growth for 2009. In the study, the IMF predicts that global economic activity will decrease by .5% to 1% next year. This is the first time in sixty years that the IMF has predicted that the global economic activity will contract to such a degree.

According to IMF officials, one of the major problems facing the global economy is the fact that advanced economies have been slow to implement policies to stabilize their economies. In their view, the longer it takes for advanced economies to implement these policies, the darker the future of the global economy will be come 2010. Implementing these policies is crucial, they argue, because currently, advanced economies' real economies have "stalled" in response to their crumbling financial sectors. How will new policies help address this problem? IMF officials believe that this is a "crisis of confidence." They maintain that new policies will help curb investors' confidence in their national economies and encourage them to spend more money and improve the real economy. On the other hand, if advanced economies continue to falter in implementing new policies, the crisis will continue to take hold of both advanced and emerging economies.

With respect to the United States, for example, the IMF predicts that, if the current administration and Congress successfully enforce its recovery plan during the second half of 2009, the U.S. may see positive economic growth in 2010. While the IMF's study notes that the "euro area" has adopted more moderate policies than the U.S., it also predicts that the stronger presence of welfare and unemployment payments there may make a (positive) difference. The IMF's study also analyzes how the crisis has spilled over to Japan, central and eastern Europe, Latin America, emerging Asia, Africa, and the Middle East. The IMF's study did not comment on the policymaking prospects of those areas, which were originally not at the epicenter of the crisis, but are now nevertheless increasingly feeling its repercussions.

The IMF prepared this study for a recent G-20 meeting in the United Kingdom on March 13th and 14th. The G-20 is the Group of Twenty biggest industrialized emerging and market economies. The G-20 countries have asked the IMF to track international responses to the financial crisis. The meeting that took place in the UK was a pre-cursor to the upcoming G-20 summit, which will take place on April 2nd. During that meeting, financial leaders from the G-20 countries pledged their support to efforts to counteract the financial crisis. According to a recent IMF press release, most advanced and emerging G-20 countries have in fact implemented stimulus packages. A caveat: Though these countries have implemented stimulus packages, they fall short of the rate that the IMF recommends, which is 2% of each respective country's Gross Domestic Product.

Discussion Questions:

1- Why do you think advanced economies have delayed in issuing and implementing policies to address the financial crisis? Could there be political reasons for doing so? Do you think that emerging economies would have acted differently? Would they have taken less, or more, time to implement policies?

2- What do you think the effects of this new study will be on investor confidence around the world? If this is a "crisis of confidence," should IMF officials think twice about releasing these figures? What would be the alternative? Does the IMF have a duty to inform the global investor/consumer about the progress advanced economies have made in responding to the crisis?

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