Monday, March 2, 2009

The need for macroeconomic cooperation

This is about the latest contribution to Project Syndicate by Jeff Sachs. He argues that the G-20 countries should seize the opportunity that the current crisis offers and to increase investment spending that will address the 'critical needs of the planet':
The world has yet to achieve the macroeconomic policy coordination that will be needed to restore economic growth following the Great Crash of 2008. In much of the world, consumers are now cutting their spending in response to a fall in their wealth and a fear of unemployment. The overwhelming force behind the current collapse of jobs, output, and trade flows, is even more important than the financial panic that followed Lehman Brothers’ default in September 2008.

There is, of course, no return to the situation that preceded the Great Crash. The worldwide financial bubble cannot and should not be recreated. But if the world cooperates effectively, the decline in consumer demand can be offset by a valuable increase in investment spending to address the most critical needs on the planet: sustainable energy, safe water and sanitation, a reduction of pollution, improved public health, and increased food production for the poor
His analysis focuses on developing countries and to the responsibilities of the G-20. Note the transmission of the crisis to the poorest countries: falling export revenues, falling remittances and falling cpital inflows:
There is a strong case for global cooperation to increase these public investments in the developing economies, and especially in the world’s poorest regions. These regions, including Sub-Saharan Africa and Central Asia, are suffering harshly from the global crisis, owing to falling export earnings, remittances, and capital inflows.

Poor regions are also suffering from climate changes such as more frequent droughts, caused by rich countries’ greenhouse-gas emissions. At the same time, impoverished countries have huge needs for infrastructure, especially roads, rail, renewable energy, water and sanitation, and for improved current delivery of vital life-saving services, including health care and support for food production
In his concluding paragraph he stresses why such a course of action would be a 'triple victory':
Cooperation can turn the sharp and frightening decline in worldwide consumption spending into a global opportunity to invest more in the world’s future well being. By directing resources away from rich countries’ consumption to developing countries’ investment needs, the world can achieve a “triple” victory. Higher investment and social spending in poor countries will stimulate the entire world economy, spur economic development, and promote environmental sustainability through investments in renewable energy, efficient water use, and sustainable agriculture.
I should mention that I'm not so sure how Sachs envisions the financing of such spending and whether he thinks such spending could pose a threat to the long term fiscal and overall health of the US, the EU or Japan. Given all the debates on the risks of huge debts I would have liked some discussion of this issue in his article.

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