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UN: More countries should follow China's fiscal efforts

By Fu Jing (chinadaily.com.cn)
Updated: 2009-01-16 09:34

The UN is calling for more countries to follow China's example and adopt massive fiscal stimulation in order to counterattack a highly synchronized global downturn.

In its report World Economic Situation and Prospects 2009, the UN said today the severity of the global recession requires policy actions that are commensurate with the scale of the problem and should therefore go well beyond any normal range of budgetary considerations.

With $1.9 trillion in foreign exchange reserves and a balanced government budget, China has enough policy space to adopt more expansionary fiscal policy necessary for stimulating domestic demand, to offset the drag of softening exports, the UN said.

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It has already begun to use this policy space to mount a large-scale plan of fiscal stimulus that could potentially contribute to reinvigorating global demand, according to the UN report.

China announced a fiscal stimulus package of $586 billion (or 15 percent of China's GDP), to be implemented during 2009 and 2010. The aim of China's package is to strengthen domestic demand, in both infrastructure investment and consumption.

Now that the purchasing power in developed economies has weakened, China finds itself at a crossroads between a new economic strategy and the recent tradition highly dependent on manufacturing exports for industrialized countries' consumption.

Moreover, the need for international policy coordination and cooperation is more pressing than ever, said the UN report. However, the report said, there is presently no credible, institutionalized mechanism for international coordination of stimulus packages or monetary policies. Such a mechanism will need to be created alongside other fundamental reforms.

Such reforms should also address the weakness of a global financial system with the dollar at the center as reserve currency. With net indebtedness of the United States still growing -- to about $2.7 trillion at the end of 2008, up from $2.5 trillion in 2007 – a disorderly adjustment of global imbalances and a hard landing of the dollar remain major downside risks.

UN has recommended a leading role by the IMF and the World Bank for enhanced international policy coordination while ensuring more equitable governance, policy advice and operations and increased weight and participation of emerging and developing countries.