Last month, reports by the World Bank (“Swimming Against the Current“) and IMF staff (“The Case for Global Fiscal Stimulus“) highlighted the negative impacts of the global recession on developing economies. They also showed that the bailout debate is about two different things in the developed and developing worlds. In the US, for example, “bang-for-the-buck” discussions are mostly about spurring economic growth –and thus saving jobs and businesses from going bust. In Africa, Asia and Latin America, on the other hand, “bang-for-the-buck” is mostly about minimizing absolute increases in poverty. The World Bank estimates 46 million new poor in 2009, with 20 million of the world’s new unemployed coming from China alone.
At stake are three different, but inter-related, questions: a “stimulus/growth” multiplier that predicts how bailout efforts might accelerate economic growth in developed economies; a “growth/poverty” elasticity that measures how declines in growth might slow poverty in developing countries; and, a “growth-in-the-north/growth-in-the-south” elasticity, that links the joint fate of developed and developing economies. The growth-on-growth elasticity is perhaps most critical, because it suggests that losses from global trade are far larger than any fiscal or financial bailout could counter.
If we had the numbers in front of us, what would a fair “global-bang-for-the-buck” stimulus package look like? On my count, assuming spurring northern growth is weighted over preventing southern poverty, a global stimulus package would be about two-thirds developed country stimulus and about one-third developing country stimulus.
If, however, we weighted deterring poverty over spurring growth, which I imagine I would, the package could easily swing the other way around –to about two-thirds developing country, one-third developed country stimulus. The obvious place to target such a weighted stimulus is China, with both a sizeable contribution to world growth and a sizeable proportion of the new poor.
All of this is, of course, just a thought experiment. At purchasing power parity, 1 dollar spent in the US is equivalent to about 2.5 dollars spent in China, making the global stimulus question for G20 leaders more political than technical.
