Will stimulus plans go global?

Efforts outside the US tend to amount to 1.5 percent of GDP or less, one tally finds.

By , Staff writer of The Christian Science Monitor

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    Not enough: A man begs on a street in Berlin. Germany has been criticized for doing too little to stimulate its economy.
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Barack Obama's economic stimulus plan is expected to reach historic proportions, but what the world could really use right now is something even bigger: similarly ambitious plans from the rest of the world.

That's what many economists prescribe as the best path out of a slump that has turned global in scope.

America is at the epicenter of the downturn, which helps explain why President-elect Obama and his team are readying a spending package that may be equal to about 2.5 percent of US gross domestic product in 2009, as well as a similar amount in 2010.

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But other nations also face considerable risks of job loss and political turmoil. Their near-term need for stimulus also meshes with a longer-term imperative: From Asia to Germany, many nations would benefit from a shift toward stronger domestic consumption and less reliance on exports to the United States.

"Ideally, they should be doing the heavy pulling," says Sherle Schwenninger, an economic policy expert at the New America Foundation in New York. "Because of the collapse of the US consumer, the US is not in a position to be the principal demand locomotive for the world, as it has been for these past 20 years."

So far, however, planned stimulus efforts outside America generally amount to 1.5 percent of GDP or less, according to a tally done by the investment bank Morgan Stanley.

"There are really only two countries that are serious about fiscal stimulus. The US is one. China is the other," says Nariman Behravesh, chief economist at IHS Global Insight, a forecasting firm in Lexington, Mass. China's stimulus is similar, as a share of GDP, to what the Obama team appears ready to push for.

Japan and most of Europe, Mr. Behravesh says, "need to double or triple the kind of numbers they're looking at."

The stakes are high. In most nations, the economy depends partly on the health of their trade partners. Even in the US, with its large trade deficit, exports have represented an important contribution to GDP.

One danger is that, if 2008 was about financial-market shock waves, this year will reveal the full social impact on jobs and consumer incomes. A recent report by economist David Rosenberg at Merrill Lynch warns that geopolitical tensions and trade protectionism – as nations try to defend precious jobs – could be the dominant risks in 2009. He says countries including Brazil, Russia, and India have already moved to raise import tariffs or other barriers on some goods.

Yet the year also brings opportunity.

UN Secretary-General Ban Ki Moon has said that collective economic challenges, including global warming as well as recession, are prodding nations toward greater coordination.

The question of stimulus is an immediate test.

A recession in much of the world is already severe, and "the consequences if we don't respond in a vigorous way ... could be even more devastating," says Tu Packard, a global economist at Moody's Economy.com.

The idea behind fiscal stimulus is to smooth out an economic downturn or aid recovery by ramping up government spending at a time when consumers are less able to spend and businesses are less willing to make investments.

Although governments borrow the money, the alternative – more job losses – might be an even harder hit because of erosion of the tax-revenue base.

"This is not the time, for example, to be worried about budget deficits," Ms. Packard says. Nor will stimulus by government "crowd out" other investments by competing with the private sector in credit markets. Those businesses have pulled back sharply on capital spending, she says.

Not every nation can easily ramp up spending. But many that run trade surpluses have the financial means to do it.

"Each country that has fiscal [capability] should contribute," argues a new report this week by economists at the International Monetary Fund in Washington.

Such measures could follow some of the same steps under review by Obama: investments in education, energy, the environment, roads, and healthcare, as well as tax cuts. Ideally, spending projects will set the stage for long-run productivity as well as create jobs in the short term.

China is spending more on domestic infrastructure but is also trying to boost sagging exports.

"They should actually be doing more [to bolster] the social safety net and less on stimulating the export sector," Packard says. "This really is an opportunity to put the world economy on sound and healthy footing."

Leaders in China are aware of the need for a stronger consumer economy, but they've had difficulty making that transition after years of success built on exports and government investment.

Similarly, Mr. Schwenninger says, the German government of Angela Merkel "doesn't seem to understand the seriousness of Germany's problems, in terms of free-riding off the rest of Europe for its demand."

The result, he says, is that Western Europe may not be able to provide much of a boost that helps the US or even its own neighbors, at a time when Eastern Europe has been hit especially hard by the tightening of global credit markets.

America's trade balance with the world – using the broad measure called the current account – will fall by more than 50 percent this year to about $280 billion, Behravesh predicts.

Rebalancing the global economy won't happen overnight. But if stimulus plans are expanded during the course of 2009 and are well designed, it could nudge the world further in that direction.

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