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Coordinate a global stimulus for this crisis

by Kemal Dervis and Juan Somavia

GENEVA — As recession spreads around the world, the global production networks that arose with the globalization of the world economy have become sources of cutbacks and job losses. Postponing purchases of new winter coats in the United States means job losses in Poland or China. These losses then translate into reduced demand for American or German machine tools.

Unemployment and reduced sales then feed back into new losses in banks’ loan portfolios, further weakening the battered financial sector. As a result, anxiety, hopelessness and anger are spreading, as what was a financial crisis becomes an economic and human crisis. Unchecked, it could become a security crisis.

Trying to rescue the financial sector without supporting a recovery in terms of businesses, jobs and family purchasing power will not work. What is needed is a large worldwide fiscal stimulus to counteract falling private demand.

Different countries’ capacity to act depends on their indebtedness, foreign exchange reserves and current-account deficits. Germany and China can do more than others. The United States can do a lot, in part because of the dollar’s status as the main international reserve currency. Low interest rates mean that the additional debt burdens from public borrowing can remain manageable.

Moreover, if the stimulus succeeds and leads to an early recovery, the additional income gained may more than offset the increase in debt. Given the collapse of commodity prices and excess production capacities, there is no short-term inflation danger, even if part of the stimulus is financed directly by central banks.

Several countries have already announced measures, but what do they all amount to? Some constitute “new” money, while others represent existing commitments brought forward. We need to assess the quality of these packages.

The argument is strong for providing stimulus through increased government expenditures rather than relying on tax cuts, because panicked consumers might save the money instead of spending it. Debt and inflation will reappear as medium-term problems, so it is crucial that the fiscal ammunition helps long-term productivity, growth and sustainability.

Of course, fiscal stimulus does not mean just throwing money at the problem. We should remember that what growth there is in the world economy in 2009-2010 will come mostly from developing economies.

Each country may hope that others will stimulate their demand while it preserves its fiscal headroom, thereby relying on exports as the engine of recovery. Each country may also be tempted by protectionist measures, trying to preserve domestic jobs at the expense of imports. Such beggar-thy-neighbor policies in the 1930s aggravated and deepened the Great Depression.

The auto industry is a good example. Measures to keep the industry afloat in one country look like unfair competition to others. A collapse in the world’s car industry must not fuel a deeper recession. The answer is to coordinate a global recovery package, which creates the opportunity to point recovery in the direction of a new generation of fuel-efficient and low-carbon-emission vehicles and green jobs.

Global coordination will increase the effectiveness of everyone’s actions. Moreover, fairness and security considerations demand that the most vulnerable, who had no role in the making of this crisis, receive support.

Extending social safety nets helps the most vulnerable and is likely to have high multiplier effects, as the need to spend is most urgent for the poorest people. Training programs, including for green jobs, should be significantly increased. Public expenditures must be focused on programs with strong employment content, such as in small- and medium-scale infrastructure projects and support to local governments.

Credit lines should be kept open to smaller businesses, which employ the bulk of the world’s workers but have the least access to credit. The use of social dialogue for crisis management should be increased, to rebuild trust. Donors must maintain the promised (and modest) levels of development aid to poorer countries. The availability and affordability of trade finance should be improved.

The International Monetary Fund and central banks should increase liquidity in a coordinated fashion in the form of short-term credit to emerging-market economies suffering from cuts in capital inflows and export earnings. The World Bank should increase lending to help finance growth-supporting expenditures in developing countries. Tangible progress is needed in global trade negotiations in order to signal that the world economy will remain open.

Meanwhile, the world must build new economic institutions. The International Labor Organization’s Decent Work Agenda of employment and enterprise, social protection, sound labor relations and fundamental rights at work creates a solid platform for fair globalization.

This crisis is also an opportunity, as it has shown that the destinies of countries worldwide are linked. Policy coordination and a global strategy that instills confidence and creates hope will bring a quicker and stronger recovery to us all.

Kemal Dervis is the executive head of the United Nations Development Program; Juan Somavia is the director general of the International Labor Organization. © 2009 Project Syndicate (www.project-syndicate.org)