Is the global economy out of the woods? Experts warn policymakers not to get too comfortable yet, Niveen Wahish reports "This is not a normal crisis. Global monetary cooperation is needed or in two years we will talk about a much bigger mess." This is how Gerardo della Paolera, president of the Global Development Network, ended his presentation to the Economic Research Forum's annual conference this week. Paolera underlined that this crisis is like no other the world has experienced before, highlighting that national and regional therapies are not enough and that the global monetary and financial architecture must be revised. While other economists were not as gloomy, they voiced warnings as well. Justin Lin, chief economist with the World Bank, told conference participants that the global recovery is "very fragile". Masood Ahmed, IMF Middle East and Central Asia department director, spoke of what to do to prevent crises or reduce their severity in the future. He said that policymakers need to make sure they get their exit strategies right. He was referring to public interventions to save the global economy. "There is a big danger that if the public stimulus is withdrawn too quickly before private demand picks up, the global economy could fall into a hole that will be difficult to get out of." He also pointed out that at this point, a redesign of the financial sector is in order. "The diagnosis of what needs to be done has been made. Now the task is to bring about these changes." However, he acknowledged that while everyone recognises the necessity of these changes, the process would be politically and institutionally complex. In the meantime, Ahmed said that there is work ahead in rebalancing global demand. He explained that although the crisis was caused by the behaviour of financial institutions, under that was a system that relied on consumption and deficit in the US verses surplus in China and the oil exporting countries. "There is a need to bring these imbalances to a more manageable level" by getting countries with deficits to contain consumption and rely on investment and exports, and getting countries with a surplus to expand local demand. Another issue that Ahmed said must be taken into account when looking forward is redesigning global governance in the financial sector. He pointed out that while the G20 has become the primary venue for discussion among the major economies, it must take into consideration the perspective of other countries that are not part of that group. And he stressed that countries of the region need to create supporting mechanisms to ensure that their ideas are registered in G20 discussions. Another dimension to global governance mentioned by Ahmed is redesigning the IMF. He stressed that it is important to focus on reforming the IMF to assure that it has legitimacy, as it cannot be effective otherwise. "And you can not have legitimacy if a large part of your membership feels that the structure is not reflective of the economic realities of today." Anthony Venables, professor of economics at Oxford University, told Al-Ahram Weekly that in light of the fact that the balance of power in the world economy is obviously changing, the governance structure of organisations like the IMF and the World Bank is changing to pay more attention to the new rising economies. "Some practical changes in the world, like the growing importance of the G20, will in the future influence how these organisations are run." Venables does not believe the world is out of the woods yet. "The recession has been a lot less severe than we all thought it was going to be a few months ago." He added, "but it will be a long haul out because public finances are in such a bad position in a lot of countries because of the recession and stimulus [packages]." Venables stressed that stimulus support should continue. However, he acknowledged that the support comes at a cost, that of high public debt for years to come. "It is the cost of mitigating the recession." That concern over government debt accumulation, said Justin Lynn, chief economist with the World Bank, might prevent countries from continuing their stimulus efforts. But he reassured that if the public debt is used for productivity enhancing activity, it would induce growth and accordingly countries would have no problem paying back their debt. High productivity projects could be found in the middle income, low income and emerging markets. "If we can find a way to help these countries with projects, it will be a way out for the world." Meanwhile, Martin Ravallion, director of the Development Research Group (the World Bank's research department), warned that the poor must not be overlooked and that large shocks can lead to a breakdown of traditional safety nets. He sees crises as an "opportunity for major pro-poor reform of safety nets" and added that even poor countries can help their poorest through workfare programmes and cash transfers. These policies are needed to avoid "inequalities that can impede reform and hence growth". But according to Venables these safety nets need to be carefully and sustainably designed to avoid, for example, a situation whereby cash transfers do not reach those who really need them.
