STIMULUS TRIGGERS INFLATION?
Justin Yifu Lin, World Bank chief economist and senior vice president, pointed out that, on a global scale, one sticking point in responding to the economic crisis was that the liquidity injected into the fictitious economic system did not fully and properly transform into vital forces in the real economy.
Increasing government debts did not necessarily bring inflation, but it should depend on how the governments use the liquidity that was pumped into the economy, said Lin after an economic forum in Seoul in June.
If the money was used in widening the bottleneck in economic development, the economy could grow more smoothly, assimilating the liquidity in the market, and thereby negating inflationary pressures, Lin said.
Moreover, economic growth increases government revenues, which will offset the debts, Lin added.
Lin pointed to China as an example.
He said that, during the 1998-2002 East Asian financial crisis, the Chinese government also adopted stimulus measures and loosened its monetary policies. During that five years, China's government debts skyrocketed from 3 percent of its Gross Domestic Product (GDP) to 36 percent, and the quantity of money supply increased sharply. However, the inflation rate rose only 5 percent in that five years while the average annual economic growth kept a fast pace of 10.8 percent.
Lin ascribed China's success in tackling the East Asian financial crisis to concentrating public investment in infrastructure construction, which was then the bottleneck that hindered economic development. For example, the total length of China's highways totaled five times than before the crisis.
EXIT DESIGN A PRIORITY
The design of exit strategies should be one of the top priorities for policy making in the next two years, according to a statement released Tuesday by the IMF.
The IMF Executive Board has approved the revision of the Fund's "Statement of Surveillance Priorities" (SSP), which spells out the economic and operational priorities for IMF surveillance until 2011 to reflect that new priority.
The IMF said the economic priorities of the SSP had been revised in response to the significant changes in the global environment over the Past year.
The initial priorities focused on resolving financial market distress, strengthening the global financial system, adjusting to sharp changes in global commodity prices, and promoting orderly reduction of global imbalances.
"These issues remain relevant, but it is clear that shifting toward the design of exit strategies and policy requirements for sustaining world growth will be key challenges looking ahead," the IMF said in the statement.
The Fund's economic priorities to be formulated include allowing for an orderly unwinding of crisis-related policy interventions to ensure a sustained recovery and, in particular, designing exit strategies that support the economy and the financial system as needed.
Surveillance is a core activity of the IMF, involving the monitoring of national, regional, and global economies to assess whether policies are consistent with countries' own interest as well as the interest of the international community.
China has always believed that countries at different stages of development should be allowed to choose their own approach and pace suited to their national conditions.
The perspective was echoed by a conclusion document of a European Union informal summit, held on Sept. 17 to coordinate positions for the summit in Pittsburgh.
"Exit strategies need to be designed now and implemented in a coordinated manner... taking into account the specific situations of individual countries," said the document.
Special Report: Global Financial Crisis
