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| IMF's research members at the release of World Economic Outlook based study [Photo: Unifeed] |
Washington: Countries battling high public debt must
combine policies that support economic growth with lasting changes in government
spending and taxation, a new study by the International Monetary Fund (IMF)
concludes.
The report notes that public debt has
surpassed 100 percent of GDP in Japan, the United States, and several European
countries in recent years.
This is especially worrying because of the low
growth, persistent budget deficits, and looming liabilities due to aging
populations in these countries. A result, particularly in Europe, has been
ratings downgrades and higher borrowing costs.
The case of the United Kingdom in 1918
offers a cautionary lesson. The U.K. government combined tight monetary policy
and severe fiscal austerity to cut the price level and return the pound to
prewar parities. The results were disastrous: unemployment increased, growth
remained anemic, and debt continued to rise.
"Supportive monetary policy,
structural reforms, and fixing structural issues with the economy: These are
all good things to be done and I would also suggest that those are just as
applicable to peripheral Europe today as they were to the UK in the
1920s," said John Simon of the IMF's Research Department.
Simon said that case studies of successful
efforts to cut debt levels over the last hundred years demonstrate that even
though it's difficult, it can be done.
"What our research shows is that there
is a tricky balance to be forged, but that history does suggest that there is a
light at the end of the tunnel in that countries have dealt with debt burdens
similar to today. We have dealt with debt burdens in circumstances similar to
today and they have successfully dealt with them. The debt has come down. So,
what we take from this is that I think there is grounds for optimism that this
will pass," Simon said.
Many emerging and developing economies did
well over the past decade and through the global financial crisis. A second IMF
report suggests this resilience is likely to continue.
The report looked at economic expansions
and downturns in more than 100 emerging and developing economies over the past
60 years.
"What we found is that the resilience
of these economies is not a recent development, but the result of steady gains
in performance over the past two decades. These economies are now spending more
time in expansion, and their downturns and recoveries have become shallower and
shorter," said Abdul Abiad of the IMF's Research Department.
In fact, the past decade was the first time
that emerging and developing economies spent more time in expansion, and had
shallower downturns, than advanced economies. This was true not just for
emerging markets, but for low-income countries as well.
So if shocks can easily derail expansions
in emerging and developing economies, what accounts for their improved
performance? Part of the improvement is because some of these shocks are less
common now than in past decades, the researchers found. But the bulk of the
improvement is due to better policies
"One reason these economies did well
in the global downturn in 2009 was that they appropriately used their policy
space—many countries increased spending and lowered interest rates to support
activity. That policy space needs to be restored, by reducing fiscal deficits
and keeping inflation in check," Abiad said.
The researchers found that these economies
have built up more room to maneuver, thanks to lower inflation and better
fiscal and external positions than in the past. Abiad said better policies and
greater policy space account for three-fifths of the increased duration of in
these economies' expansion, and less frequent shocks accounts for the
remainder.
However, Abiad says that growth in advanced
economies is largely beneficial for emerging markets, and monetary policy has
its place in supporting growth in advanced economies.
"The Fund's view is that monetary
easing in these economies to the extent that they help avoid a downturn in
advanced economies is a net plus for the global outlook. One of the key results
of our chapter is that recessions in advanced economies double the likelihood
that expansions in emerging and developing economies will come to an end,"
Abiad said.