Structural reform, please

Posted on June 29, 2010 | View 612 | Comment : 4

Stimuli Won't Cure All G20 Nations

Prime minister Manmohan Singh warned the G20 at Toronto that deflation was a greater threat than inflation, so countries should not prematurely withdraw their financial stimuli introduced during the Great Recession of 2007-09.

This was a bit rich, coming from a country with 10% wholesale price inflation and 14% consumer price inflation. Dr Singh covered himself by adding that exit from the stimulus should be calibrated to country conditions, and one size would not fit all.

This is a sensible formulation, but partially contradicts the case for maintaining the stimulus. Keynesian stimuli have often failed. Greece is a good example where two years of stimulus produced little growth but huge fiscal deficits, driving the country towards sovereign default.

Portugal and Spain are in fiscal trouble too, and if contagion spreads to Italy — where public debt is already 120% of GDP — the European financial system could be paralysed.

Dr Singh said countries should not be bulldozed into premature withdrawal of their stimuli, but can it be called premature in countries where sovereign bonds are crashing and being downgraded to junk?
Keynesian economics requires fiscal surpluses in good times no less than deficits in recessions. Countries that don't create surpluses in boom times may fail with deficits in bad times.

Markets have learned the lesson, but politicians remain reluctant to do so. One exception is UK Chancellor of the Exchequer George Osborne. He is clear in his mind that the British fiscal deficit is structural, not cyclical, and requires austerity to restructure the whole pattern of saving and spending.

He does not think the economy can be fixed by desperately hoping that continuing deficits will produce growth faster than they produce bankruptcy. Many other G20 countries have structural deficits too.

India and some other developing countries have strong growth prospects, and can grow out of high deficits.

But mature economies have weak growth prospects and cannot afford high deficits in the manner India can. Structural adjustment is not a remedy for spendthrift developing countries alone: it is a remedy for spendthrift rich countries too.

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Comments (4)

  • The advise by our honourable prime minister is a vlauable and definitely an expert advice. But in India, despite the so called "Stimulas package", no tangible result is being seen on any of the job creation front, development,education to poor an all, No one knows where is the stilulas money is goig on. There are so many leakages on the way and becuase of political compulsions, Dr. Singh's government is not able to perfrom effectively on home front. There is no coherence and consistance in the economic policy making at Govt level, There are so many projects half heartedly left by this government which can bring the economic improvement coupled with the stimulus package. Construction of Roads, improvement in health services across india, improvement in Transmission & distribution of POwer ...See More

    Posted by Girish Marathe | 29 Jun, 2010

  • I feel stand alone solutions like structral reforms, reduction of deficit fianace through exit from stimulee, stimulating internal demand, exchange rate management,regulations etc cannot bring the desired results. Combination of two or more depending upon the country specific requirments can deliver the desired results. I strongly opine that India could not only withstood the turmoil on account of culturly coservative buying behavior,social orientation to withstand rainy season,effectiveregulatory system,prudent approach to lending, entreprenuership of Indians etc. All these need to factored inarriving at practical solution to the problem of individual country

    Posted by N.K.KHANNA , CFO at STPL | 29 Jun, 2010

  • In a democracy, the rich scam the poor. It would be cruel to call it scam, so we call it stimulus.

    Posted by Tejinder | 29 Jun, 2010

  • Please differentiate between the Haves & Have Nots! You have high profile meetings at the expense of the people ! Yet you are unable to control inflation.We know you have all the abilities of leadership& have been made one because of circumstances.We implore you to control the economy so that the common man is not adversely affected.Do not make promises Act!

    Posted by Ali ShahanShah , Advisor at Adani Power Ltd | 29 Jun, 2010

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