There are many important challenges facing G20 leaders when they meet in London in early April.
The first is to coordinate sufficiently large fiscal and other measures to ensure that world aggregate demand recovers, and a major recession is avoided.
It is also crucial that concrete measures are taken that will allow developing countries, especially those that may become foreign-exchange constrained, to sustain growth. This will not only be key for avoiding a large slowdown in growth and increase in poverty in those countries, but also to guarantee important demand for developed country exports. It is estimated that around 200 million people could be pushed into poverty, mainly in developing countries, if rapid action is not taken to soften the impact of the crisis on those countries.
QUICKLY REFORM THE IMF’s COMPENSATORY FINANCING
The calls for significantly expanding the resources of the International Monetary Fund (IMF) by several G20 leaders are welcome. One effective way of doing this would be through a counter-cyclical expansion of official liquidity, by a one-off, large issue of IMF Special Drawing Rights (SDRs). This would compensate for the large contraction of private liquidity, which has resulted in a sharp fall in private capital flows to developing countries. Once the situation normalizes, the SDRs could be reabsorbed by the IMF. The major objection to SDR issues in the past has been the threat of inflation. It has no validity at present. The dominant threat is of deflation and recession.