On the modalities of a coordinated G20 stimulus

The global economy appears to have coped with recessionary risks that were stoked by high interest rates and inflation throughout the 2022-2023 period. As noted by the IMF’s Chief economist Pierre-Olivier Gourinchas, “the global economy continues to display remarkable resilience, with inflation declining steadily and growth holding up. We are very far from a global recession scenario.”[1] Furthermore, January’s global risk survey from Oxford Economics points to a recession probability of 7.2% — less than half of the levels witnessed in October 2023[2]. But notwithstanding the improved sentiment, global risks remain elevated and conducive to a similarly rapid shift in the fortunes of the world economy. These fragilities are further aggravated by the lack of international coordination concerning how to preempt and contain a global recession. The G20 as the main platform in launching coordinated anti-crisis stimuli continues to lack inclusivity in terms of its membership and policy outreach as well as the resources to counter a full-blown global recession. Hence, in the true spirit of counter-cyclicality it may be opportune to explore some of the improvements to the framework of the G20 coordinated stimulus while recessionary fears are not as pressing.     

There may be several ways to look at upgrades to coordinated stimuli undertaken by the G20 – one possible aspect is quantitative that looks at the scale of resources that may be brought to bear in dealing with the downturn; the qualitative aspect would explore the potential changes in the modalities and the composition of the coordinated stimulus to make it more targeted and effective. On the quantitative side of the coordinated stimulus there is a clear lack of coordination between individual G20 core members and the regional development banks (RDBs), regional financing arrangements (RFAs) as well as such influential actors as sovereign wealth funds (SWFs). While the most recent G20 coordinated stimulus undertaken in 2020 was superior to that of the 2008-2009 period in making use of the resources of the multilateral development banks, there arguably remains significant scope to further raise the level of utilization of resources available in the Global Financial Safety Net (GFSN).

In order to magnify the synchronicity effects of the G20 stimulus, all layers of the Global Financial Safety Net need to be employed, not only the level of the resources coming from G20 member countries. This implies that the G20 coordinated stimulus apart from the national contributions from core G20 members needs to be reinforced by a stimulus from the level of global institutions such as the IMF via SDR issuance (that should largely prioritize developing economies) as well as regional development organizations. The involvement of regional arrangements such as RDBs and RFAs within the G20 coordinated stimulus is warranted by their sheer size – in terms of available resources regional development banks vastly exceed the fire-power of global institutions such as the World Bank, while the resources of the IMF have also been surpassed by RFAs. An explicit inclusion of financing from the regional development institutions as well as the sovereign wealth funds into the overall size of the G20 stimulus would likely impart a stronger effect on the markets that typically prefer to see deeper buffers coming from the G20 during episodes of economic adversity.   

A key qualitative feature of an improved framework for G20 coordinated stimulus would be a greater reliance on platform formats – whether among the regional trading arrangements, regional development banks, regional financing arrangements or sovereign wealth funds. Such a framework allows for more regular policy coordination and more scope for pooling resources across such platforms. The platform for regional integration arrangements could work with the WTO and the G20 to keep a lid on protectionist impulses during downturns, while the platform for sovereign wealth funds could coordinate investment strategies that would strengthen the growth response of the world economy to coordinated stimuli.   

A platform for regional integration arrangements could raise the degree to which the stimulus can reach a greater number of regions and economies across the globe via the more targeted measures and additional stimuli undertaken in the respective regional integration arrangements. This is due to the significant capability that regional institutions possess in tracking intra-regional spillover effects as well as their experience in promoting economic policy coordination within their respective regions. A coordinated G20 stimulus can hence become more targeted, effective, inclusive and sizeable with the involvement of regional blocs and their developing institutions.

In terms of the sectoral composition of the G20 stimulus, the growth response from the world economy is likely to be greater if the resources are directed into industries with the highest multiplier effects. While the sectoral multipliers will differ across countries, some of the highest growth effects were associated with sectors such as manufacturing and housing construction that involve a wide range of industries in the production process. In the trade and investment sphere allocations by global organizations and regional development banks into sectors that exhibit high trade intensities and high dependency on the operation of global or regional value chains could support global growth through international trade and investment cooperation. Some of the sectors that exhibit high multiplier effects and high trade intensities include IT as well as such manufacturing segments as cars, computers and medical equipment.

Apart from considering Leontieff’s Input-Output multipliers at the national level as well as at the level of key sectors of the global economy[3], there is a need to gear the composition of stimulus to sectors that have to do with “human capital” development such as education and healthcare (both at the national level and at the level of regional and global development institutions). Counter-cyclical mechanisms that prioritize social protection, including social transfers and unemployment benefits, need to be accorded greater weight within the overall composition of G20 stimuli. Another crucial strategic consideration is to use the pressures from the crisis as a way to modernize the industrial base via prioritizing sectors that are key for technological change such as the digital economy and AI.

In the end, a robust ex-ante framework of a coordinated G20 stimulus would lower the susceptibility of the global economy to crises and boost market confidence in the capability of the international financial system to cope with adversity. A framework that is transparent and well-communicated to market participants in advance may improve market confidence during periods of increased risk and volatility. There may also be a case for not only stress-testing the global financial system to various potential shocks, but also for running simulations of coordinated G20 stimuli on an annual basis (perhaps the Financial Stability Board could time this exercise to coincide with IMF/World Bank meetings) – something that would further boost market confidence in the degree to which the world economy is prepared to cope with a global downturn.  

[1] https://www.weforum.org/agenda/2024/02/imf-economic-growth-eurozone-recession-5-february/#:~:text=%22We%20are%20very%20far%20from,%2C%20global%20growth%20averaged%203.8%25.

[2] https://www.grantthornton.com/insights/articles/insights/2024/analysis-risk-of-global-recession-falls-substantially

[3] A lot of work is still to be undertaken in coming up with solid data and estimates of multipliers for industries at the global and regional levels.

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