For a while, I have being touching upon the policies different country groups implement to tackle economic contraction and rising unemployment. Two main phenomena attracted attention in this context. First, there were fundamental differences between the countries, which are not developed and which were affected by the crisis the most, in terms of their responses to the crisis. Second, such difference could also be observed between the responses of developed countries and other countries. Today I want to discuss the possible reasons for this difference.
Table 1 shows the ratio of the value of fiscal and financial measures to the national income of the particular country among G-20 countries. Data is taken from a report published by the IMF (IMF Staff Position Note, SPN/09/21, July 30, 2009). Though various financial measures have been implemented, I took into account two of them: direct capital support from government budget to financial institutions, and total amount of financial assets treasury purchases from financial institutions and firms. On the other hand I did not consider the state guarantees at significant levels provided in particular by developed countries. Table also involves 'automatic stabilizers': for instance, in some countries, when unemployment rises, unemployment benefits automatically rises provided that the relevant legal regulation exists. Therefore, a policy to stimulate domestic demand steps in automatically. This is more common especially in developed countries.
Table: Response of G-20 to the crisis (%GDP)
|
|
Developed |
Other |
||||
|
2009 |
2010 |
Total |
2009 |
2010 |
Total |
|
|
Fiscal |
1.9 |
1.6 |
3.5 |
2.2 |
1.6 |
3.8 |
|
Financial |
8.7 |
8.7 |
0.5 |
|
|
0.5 |
|
Automatic stabilizer |
2.4 |
2.5 |
4.9 |
1.1 |
1.2 |
2.3 |
|
Total |
13.0 |
4.1 |
17.1 |
3.8 |
2.8 |
6.6 |
There is a huge gap between developed countries and others. The reason that first comes to mind is that developed countries have the economic structure that will allow them to spend more. Nonetheless, fiscal indicators are not in favor of developed countries in G-20: for developed countries group, ratio of public debt to national income was 79 percent in 2007 and is expected to reach 101 percent in 2009. Both the level of public debt is high, and the measures implemented will lead to a significant rise in the future. However, for other countries, the same ratio was only 38 percent in 2007 and is expected to reach 39 percent in 2009. There exists a striking difference. A similar result can also be seen in terms of the ratio of budget deficit to the national income. Developed countries: 1.9 percent in 2007 and 10.2 percent in 2009; others: -0.2 percent in 2007 (budget surplus), 4.9 percent in 2009.
One can object that it is not possible to assess all developed countries in the same way and that the mentioned rates are quite lower for some of them. It is correct, but the main issue does not change: there exists an asymmetrical situation. Another objection might be that some certain countries in the group of others still have some vulnerabilities, and thus it is not easy for them to implement policies to boost domestic demand. The table I provided on Thursday actually demonstrated such differences. In the light of that table, it is possible to make this conclusion: as of the end of 2007, lowest the ratios of public debt, budget deficit and current account deficit to the national income were, strongest were the domestic demand boosting responses the countries gave.
We are OK up to this point, but I have the impression that some countries in the group of others yet did not utilize the fiscal opportunities. For instance, Turkey...
Note: On my commentary of September 20, I compared the growth rates derived from industrial index with that from industry sub item of the national income quarterly for the period between 1999 and 2009. To ensure that the comparison will be health in terms of the method of deriving the data, I have to use the 2006-2009 period. I would like to thank to Orhan Karaca for his carefulness. Anyway, the results for the period from 2006 to present do not change. While the highest different between the two growth rates was below 2 points, it rises as of the third quarter of 2008. The difference reaches 6 points in the last quarter: According to GDP data, industrial sector growth is minus 8.7 percent in the second quarter. However, industrial production index growth for the same period is minus 15.4 percent. This is a significant difference that needs to be explained.
This commentary was published in Radikal daily on 05.10.2009
